McHENRY, Ill. — With an increase in pork production and additional infrastructure built to handle more hogs, the pork industry will need cheap feed to maintain the expansion, an Allendale, Inc. analyst said last week.

 

About 122 million hogs are projected to be slaughtered in U.S. plants this year, a 3.2 percent increase over 2016, said Rich Nelson, the company’s chief strategist. A record production of 25.7 billion pounds of pork is expected.

“The expansion phase (over the last few years) was primarily based on cheaper feed costs,” he explained. “The problem is we have some new plants coming on board; a lot of new barns have been built to help support those plants. We cannot deal with higher prices on grain simply because we’re locked into needing this cheap feed.”

Demand, including excitement over export potential, is a secondary factor in the production increase, Nelson noted. He spoke during Allendale’s Ag Leaders Outlook Series in late July.

Hog prices were still near their summer high the last week of July, but were expected to start falling in the next month or so. They will be much lower in October, November and December, Nelson said. “As of right now, if you were going to sell lean hog futures all the way out through 2018 and if you were going to buy your feed all the way through 2018 needs as well, you could lock in profit,” he noted.

The number of hogs and pigs on June 1 totaled 71.7 million head, the USDA’s National Agricultural Statistic Service (NASS) said in its June Quarterly Hogs and Pigs report. This is the highest June 1 inventory of hogs and pigs since reporting began in 1964, NASS stated.

Demand, especially in exports, should help with at least some of the production increase, Nelson said. About 22 percent of all pork produced in the United States is exported. Allendale expects an 8 percent jump in exports this year, over 2016.

“If we’re talking about a 3 percent increase in year-over-year pork production, you can automatically write about 1percent of that off simply because of our increase in pork exports,” he said.

“We also have our general population increase here in the U.S., which is about a 0.7 percent increase.

“So, as we’re kind of laying down the list of demand increases, we’re finding a lot of offsets for this pork production increase.”

Demand is never going to wane significantly, said Jon Marcus, principal at Lakefront Futures & Options LLC, based in Chicago. “People are always going to eat pork and beef,” he noted. “They make up a big part of our diet.

“Pricing will affect demand more than anything else. If you think about it from a thirdgrade level, everybody’s got to eat. The population is rising and the pressure is on producers to get their products out there.”

A drop in demand could happen if a disease such as bovine spongiform encephalopathy (BSE, or “mad cow” disease) were to occur, Marcus said. Even then, the public “sometimes has shortterm memory issues. You will remember that, until the next time you have craving for a pork or beef product.” 

 

Recent numbers from the USDA show the cattle and calves inventory as of July 1 was 102.6 million head, a 4.4 percent increase over July 2015.

There was no July report last year due to budget cuts.

“This does tell us we have been expanding and will also have some goodsize numbers waiting for us on the next (USDA) inventory report that comes out in January,” Nelson explained. “We have been in an expansion and now we’re seeing the fruits of that expansion.”

Strong profits encouraged producers to expand their herds, he said. “I don’t think anybody in the industry could have fathomed what we did in 2014. Even when Allendale was at its most bullish point, we were short in terms of our price outlooks by about $30 up to $40 per head during the peak of the market in 2014.

We did have an extreme profit incentive and producers did respond.” A sharp drop in prices in 2016 may have discouraged some producers, he said.

“At a very minimum, we’re slowing and putting the brakes on expansion and maybe going neutral. I would not say we’re in contraction, though. We are more or less moving from strong expansion to now moving into neutral,” Nelson said. “We probably will move into contraction at some point; I would guess maybe the 2019 period or maybe 2020. We should expect in general rising beef production certainly through 2018 and a question for 2019.”

Beef production is expected to be 26.5 million pounds this year, a 5 percent increase over last year and the highest supply offered in about eight years, he said.

Earlier this year, the United States completed a deal with China to sell beef to the country for the first time since BSE was found in the U.S. in late 2003.

Export restrictions include no use of any type of growth-promoting product, Nelson said. “This does restrict quite a few numbers of available cattle that are currently in feedlots. As it stands now, we don’t quite have that product. The supply is limited in the very short term.” 

 

In June, the United States suspended imports of fresh beef from Brazil because of concerns over product safety. “The (Brazilian situation) puts more pressure to make sure the U.S. calf crop is there every year and getting beef to where it needs to go,” Marcus explained. “I think we’re pretty self-sufficient in having the amount of beef we need. I don’t think (the suspension) was really significant.”