The Attraction of More - 2

Pork Producers Catch a Break

U.S. sows are now producing pig litters that average 10.53 and projections are for that number to trend up to 10.7 by the end of the year. (DTN/Progressive Farmer photo by Dave Tonge)

With profits penciling in at about $11 per head, pork producers are enjoying a well-earned break from trouble. It's not a bad spot to be in, Steve Meyer said.

Vice president of pork analysis at EMI Analytics, Meyer called pork production "very profitable" and estimated breakevens at $66 per cwt of carcass weight. It's a number helped significantly by the lowest feed prices the industry has seen since 2007.

Large supplies could become a weight on the market, however, and are a concern. Currently, the breeding herd is at 6 million head, the largest since December 2008. The combined breeding herd and market hog numbers total 68.3 million head -- a 1% year-over-year increase for both.

In addition, U.S. sows are getting more productive. Meyer, also the consulting economist for the National Pork Producers Council, said pigs per litter are up to 10.53 on average. And more is possible this year.

"We think we can do 10.7 pigs per litter by the end of the year. In 2006, it was barely above nine pigs per litter. That is a remarkable improvement due to better genetics and management," he explained.

OVERCAPACITY CONCERN

Between expansion, improved productivity and limited disease pressure from the porcine epidemic diarrhea virus and porcine reproductive and respiratory syndrome, Iowa State ag economist Lee Schulz is concerned hog production may be running well ahead of the industry's processing capacity by the year's end.

Will Sawyer, Rabobank animal protein analyst, said new plants are being built, but they are geared toward exports of pork to China.

"The question is, can we supply enough ractopamine-free product to fill the plants? That is up to the producers and packers," Sawyer noted.

For now, Meyer said the implications of overcapacity at packing plants are bigger pigs and increased bargaining power for packers. Producers learned a painful lesson about insufficient slaughter capacity in 1998, when hogs dropped to $10 per cwt.

Concerns about overcapacity are somewhat offset by strengthening demand—up an average of 5.3% each of the last three years. Per-capita disappearance at the retail level is projected to increase slightly for 2016 to 50.1 pounds from 49.7 pounds in 2015.

Exports, always a critical part of the pork picture, are also projected stronger for 2016, at 5.1 billion pounds, as they rebound from a drop in 2015 that added up to a total of 4.9 billion pounds.

Last year, pork exports accounted for just more than 20% of sales of U.S. production of pork muscle cut. That was down from 21.2% in 2014 and a high of 23.1% in 2012. The recently completed Trans-Pacific Partnership agreement holds great promise for future growth of pork exports, Meyer believes, but he doubts it will have much, if any, direct impact until 2018.

On the import side, Rabobank's Sawyer predicts Canada will send 6 million hogs here in 2016. That will add to supplies already expected to grow as a result of more U.S. production—nearly 25 billion pounds this year, up from 24.5 billion pounds in 2015.

As a whole, Meyer said he's upbeat about this year for pork producers. But his positive outlook has its time limitations.

"I'm pretty optimistic about 2016 and guardedly optimistic about 2017," he said. He adds this is a good time for producers to look to price-protection strategies.

"The futures market offers good pricing opportunities. If I had many hogs, I'd have a good many of them priced at this point."

(VM/CZ)