Rabobank Report Predicts Pork Profitability to Return by End of 2009

NEW YORK, July 17 /PRNewswire/ — Although higher input prices have kept pork producers in the red for close to nine months, a new Rabobank report, “U.S. Pork,” predicts they are likely to see profits again in 2009.

“After more than three years of strong profitability, U.S. hog producers have been in the red for the last nine months. It has been suggested that the industry is in the middle of a perfect storm – excess hog supplies, record feed prices and initial concerns regarding the robustness of domestic demand,” said Fiona Boal, Executive Director of Rabobank’s Food & Agribusiness Research and Advisory (FAR) department.

“While the industry is undoubtedly being forced to adjust to a new, unique, and difficult, operating environment, a 1998-like collapse does not appear likely and those participants with the financial resources and management expertise to survive the next 12 to 18 months should enjoy renewed levels of profitability by the end of 2009,” said Boal.

Domestic Demand Remains Solid

U.S. demand for pork is holding up well. The index for consumer-level demand, which is calculated by the University of Missouri, rose 2.5 percent in 2007 and was 0.2 percent higher than one year ago in the first quarter of 2008. Beef demand was down 3 percent and poultry demand up 3.2 percent over the first quarter.

“These figures are consistent with an economy in a recession — lower beef demand, steady pork demand and higher chicken demand,” said Boal. “The ‘trading down’ phenomenon appears to be at play with consumers shifting their protein expenditure away from beef to less expensive chicken.”

However, pork’s competitive pricing at the retail level is expected to continue through the summer months. Pork prices will be bolstered by higher chicken prices and will be sustained in the long term by constraints on cattle availability. The pork industry is also less affected by the foodservice sector, which is suffering as consumers reduce their expenditure on meals outside of the home.

Supply

Hog supplies began rising in 2007 following the widespread use of vaccines for porcine circovirus and moderate sow herd expansion. This high supply has led to high slaughter levels. Weekly hog slaughter was the highest in recent history the first 6 months of 2008 – at one point exceeding 2.4 million in a single week. However, numbers could have been even higher.

“The industry should be thankful for the expansion constraint it showed through much of 2005, 2006 and 2007; there could have been even more hogs available today,” said Boal. “During this period of industry profitability, the U.S. breeding herd increased by a little more than 3 percent, a very modest level of growth compared to past hog expansion phases.”

In an initial effort to keep supply in check, sow slaughter levels in the first half of 2008 have been significantly higher than those in the first half of 2007 and should accelerate further. Additionally, smaller operations are shutting down, particularly diversified farms that can rely on grain revenue, while larger producers are being more ruthless in cutting the bottom 10 percent of their herds.

“Given that the industry has only been losing money for the last nine months, a production response this quick is quite remarkable and illustrates the increased level economic realism in the industry and the fact that production decisions are being made by fewer, larger players,” said Boal.

Record Input Prices Squeezing Producer Margins

Higher input costs are well documented and are the main cause for the average hog producer to lose as much as $50 a head so far this year. Based on futures prices at the end of June 2008, assuming non-feed costs remain constant, hog producers will not be able to achieve a breakeven scenario until May 2009.

“Assuming that at some point hog and pork prices move higher to compensate for higher production costs, what may be even more concerning over the longer term is the volatility in the grain markets, which – coupled with other elements – would equate to a significant price risk management challenge for all producers and users of grain,” said Boal.

Export Demand at Record Levels

“It has been well documented that U.S. pork exports have reached record levels for each of the last 16 years; an impressive feat for any industry. And pork exports are on pace to set new records in 2008,” said Boal.

In the first four months of 2008, U.S. pork exports (excluding variety meats) were 52 percent higher than 2007 levels. Totaling more than $1.4 billion so far in 2008, U.S. pork exports could surpass $4 billion for the year. “An explosion in pork exports has undoubtedly helped keep the U.S. industry from diving deeper into the red over the last few months,” said Boal.

Source Citation   (MLA 8th Edition) “Rabobank Report Predicts Pork Profitability to Return by End of 2009.” PR Newswire, 17 July 2008. Infotrac Newsstand, http://link.galegroup.com/apps/doc/A181462065/STND?u=fairfax_main&sid=STND&xid=bc624cf0. Accessed 24 Mar. 2019.