Vita Plus Swine Team Webinar – Pork market update with Dr. Steve Meyer
During a recent Vita Plus Swine Team Webinar, Dr. Steve Meyer, Kerns and Associates, provided attendees with an update on what pork producers can expect from the corn, soybean and hog markets for the rest of the year.
Meyer started with an update on cost of production and said the 2020 corn and soybean crops were “off to a rousingly good beginning,” but he cautioned, “it doesn’t mean it will get to a rousingly good end.”
Corn is substantially ahead of last year and on par with crops from 2016 and 2018 when both years had record crops. Meyer said the corn market will be influenced by weather and corn usage, particularly ethanol usage, which has been down because of fewer people driving. Temperatures and precipitation are predicted to be above average across the Midwest and into the Cornbelt, but experts also predict we may have the hottest July since 2012, and that crop failed.
Meyer described soybeans as a “gracious plenty” with a 4.1 billion-bushel crop predicted. He said the rest of the world is a little more hesitant on soybeans, which means more risk for higher prices on soybeans and soybean meal, although, with soybean meal prices well below the five-year average, he said it is a good bet to lock in soybean meal at $300 per ton.
“We think you’re in a very good position to lock in a reasonable feed cost and cost of production out through the 2020/21 crop year,” Meyer said.
The Kerns and Associates model predicts breakeven costs for the top 25% of producers to be around $61 per hundredweight (cwt), and $65 per cwt for a majority of producers. He said this is a much better cost situation than in the past and is the lowest since at least 2010, maybe even 2007. On the negative side, for producers averaging a cost of production at $65 per cwt or higher, futures markets for lean hogs don’t indicate a profitable month until next summer.
Turning to output, Meyer said pork producers had record production in the first quarter of 2020 followed by a demand crisis and then a processing bottleneck leading to an “unmitigated disaster.”
Meyer said he was surprised by the higher number of hog inventories in several weight categories reported in the recently released USDA June quarterly hogs and pigs report. He said he believes these numbers suggest producers were using diets to hold more pigs than just their heavyweight, market-ready hogs. He also noted the estimated U.S. breeding herd was down, but not as much as he suspected.
Meyer noted that, at least through August, slaughter numbers will be determined by shackle space available, not the number of hogs that are market-ready. Meyer sees hog harvests increasing by 5.3% from the second to the third quarter, but decreasing in the fourth quarter due to capacity limitations, although prices will be better.
Idling capacity was as high as 39% in early May when many processing plants shut down. Many have since reopened, adopted COVID-19 safety guidelines, and are operating at roughly 5% idling capacity today. Meyer said he does not expect plants to get back to 100% capacity any time soon.
At 95% capacity, Meyer anticipates processing plants will be able to harvest around 2.5 million head per day moving forward. However, he estimates we still have about 2.3 million surplus hogs, and he expects this number to carry over into the fourth quarter unless those numbers can be reduced via euthanasia, harvest, or put back on hold diets.
“In my opinion, I think we still got to take 5% to 8% of that May pig crop out to get under fourth quarter capacity,” Meyer said.
Wholesale pork prices have experienced extreme volatility throughout the pandemic, but Meyer expects prices to settle around the low $60 per cwt range and rally to $70 per cwt in the fourth quarter. This will largely depend on the recovery of processing plants and food service.
The Kerns and Associates model predicts the average national net hog price paid by packers to be between $47 and $50 per cwt for the summer months, increasing to $61 to $64 per cwt in the fourth quarter. The model predicts prices to drop again to $54 to $57 per cwt in the first quarter of 2021. Meyer pointed out the model’s predicted cash prices for the first half of 2021 were lower than where the futures markets were trading as of July 7.
Packer gross margins spiked in May when wholesale prices increased, but they have since fallen back to a more “normal” level between $40 and $50 per cwt for “the new normal for the world that we are in.”
He said it will be important to keep pork exports strong for long-term growth, and a government purchase of pork would also be helpful because we now have a supply problem.
To conclude, Meyer said U.S. pork consumption is down this year mainly due to food service demand being down sharply, although it is slowly starting to improve.
“We need all of the [breakfast restaurants] in the United States to get back open,” Meyer said.
Long-term, Meyer expects per capita pork consumption to stay flat at around 50 pounds per person per year. He also believes the breeding herd will eventually contract by 3% to 5%, thus production in 2021 will be down slightly despite productivity per sow continuing to improve.
Corn and soybeans
Markets and economics