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Pork Outlook Report - December 2003

by 5m Editor
30 December 2003, at 12:00am

By U.S.D.A., Economic Research Service - This article is an extract from the December 2003: Livestock, Dairy and Poultry Outlook Report, highlighting Global Pork Industry data. The report indicates that Fourth-quarter hog slaughter so far is running ahead of expectations.

USDA Economic Research Service

Retail Pork Price
Percent change from previous month
Fourth-quarter prices of live-equivalent 51-52 percent lean hogs are expected to range between $37 and $38 per hundredweight (cwt), almost 20 percent higher than a year ago.

A continuation of weekly hog slaughters of 2.1 million head since the first week of October will bring fourth-quarter slaughter to only slightly below 1998, when hog prices collapsed. With an expected slaughter of about 27.4 million head, and dressed weights of 199 pounds, fourth-quarter pork production could be record-high at about 5.45 million pounds, 3 percent greater than last year and 4 percent more than in 1998.

Retail pork prices are expected to finish 2003 averaging in the mid-$2.60s per pound. Retail prices in 2004 will likely average 1 percent higher. Through October, pork exports ran more than 6-percent above last year. Japan, Mexico, Canada, and smaller Asian countries were the primary destinations for U.S. pork products. The United States imported 14 percent more pork products, primarily from Canada and Denmark.

Record Beef Prices Support Pork Sector Above Year-Earlier Levels

Fourth-quarter prices of live equivalent 51-52 percent lean hogs are expected to average $37-$38 per cwt, almost 20 percent higher than a year ago. Weekly hog slaughter since the first week of October has been a consistent 2.1 million heads or above, with the exception of holiday weeks. Given this weekly slaughter pattern, fourth-quarter hog slaughter will fall only slightly below 1998 when fourth-quarter hog prices were $22 per cwt. With an expected slaughter of about 27.4 million head, and dressed weights of 199 pounds, fourth-quarter pork production will be record high at about 5.45 million pounds, nearly 4-percent greater than last year, and 4 percent more than in 1998. If current price and production expectations are met, the market will be faced with higher hog prices and record-high pork production, a situation at odds with all those Economics 101 scenarios where prices are low when production is high.

It appears that the dynamics of another variable--Choice beef prices--explain higher hog prices at the same time that the industry is producing record quantities of pork products. Record-high cattle and beef prices have probably fostered a shift by consumers toward relatively lower-priced pork products. The shift in demand toward pork is signaled by the higher wholesale carcass cutout value, which averaged $58.08 during October-November, almost 8 percent higher than in the same period last year. The higher cutout provides an incentive for packers to pay higher prices for hogs while, at the same time, enabling them to maintain positive slaughter margins.

Stronger Retail Pork Prices Expected

Strong consumer demand for pork is expected to send fourth-quarter retail prices about 4 percent above same-period prices a year ago. Fourthquarter retail pork prices typically drop below third-quarter prices. But this year the reverse is expected. Fourth-quarter prices are expected to be slightly higher than the third quarter price of $2.70 per pound. For 2003, retail prices are expected to average in the mid-$2.60-per-pound range, less than 1-percent above 2002. In 2004, with tight beef supplies continuing to drive pork demand, and slightly lower pork production, consumers can expect to pay about 1 percent more for pork than in 2003.

2003 Pork Exports Running Ahead of A Year Ago

In the first 10 months of 2003, U.S. processors exported 1.4 billion pounds of pork, more than 6- percent above the same period last year. As usual, the largest foreign markets for U.S. pork products this year have been Japan, accounting for 49-percent of exports, Mexico, accounting for 19-percent, and Canada, which has so far taken 11 percent of U.S. pork exports. Larger exports to smaller Asian countries--Korea, Taiwan, and Hong Kong--have compensated for slower shipments to Canada.

So far this year, Japan has imported 683 million pounds of American pork products, almost 6- percent more than in the same period last year. The increase has come despite Japan’s imposition of the pork Safeguard on August 1. The Safeguard is a 25-percent increase in the minimum import price of pork, which is sanctioned by the World Trade Organization to protect Japanese pork producers from the price effects of import surges. The Safeguard has been imposed three times by the Japanese Government in the last three calendar years. It will be lifted April 1, 2004, the first day of the Japanese fiscal year.

With the Safeguard in place, Japan imports less pork. When Safeguard imposition appears imminent, Japanese traders import enormous quantities of frozen pork, accumulating huge stocks to supply domestic markets while the Safeguard is in place. Imports of frozen pork thus decline the most while the Safeguard is in place, and imports of fresh pork products take relatively less of a “hit”. Consequently, Denmark, which for geographic/transport reasons can only export frozen pork to Asia, is affected by the Safeguard to a greater degree than the United States and Canada, whose exporters ship both fresh and frozen pork products. Japanese import data indicate that U.S. pork has gained market share so far this year, at the expense of Canada and Denmark. Through August, the U.S. share of Japanese imports was 34-percent, a 6-percent increase from the same period in 2002. The market shares of both Canada and Denmark declined. Canada lost 5-percent, while Denmark lost 9-percent.

Japanese market share changes are likely due, in part, to relative exchange rate changes that have taken place this year. Since January, the U.S. dollar has depreciated against the Japanese yen by more than 8-percent, meaning (ceteris paribus) that U.S. products were 8-percent cheaper in November than at the beginning of the year.

Both the Canadian dollar and the Danish krone have appreciated against the yen since January, likely contributing to market share losses. In November, the Canadian dollar cost almost 8- percent more in terms of the yen than in January, and the Danish krone appreciated about 3-percent against the yen.

Exchange rate dynamics in 2003 have favored American pork products, making them cheaper to Japanese customers, while currency appreciation makes Danish and Canadian products more expensive. Favorable U.S. dollar-yen rates, and the U.S. ability to ship fresh pork products while the Japanese market is hindered by the Safeguard, are likely factors driving gains in the U.S. share of Japan’s pork import market.

The current USDA forecast has Japan importing about 1 percent fewer pork products in 2003 than last year. In 2004, Japan is expected to import the same quantity of pork as in 2003, with the U.S. market share gains likely to continue.

U.S. pork exports to Mexico through October show a gain of almost 3 percent over a year ago. Mexico imported 266 million pounds of U.S. pork in the first 10 months of 2003 and remains the second most important market for exported U.S. pork, accounting for 19 percent. Through September, Mexican imports were running behind last year, which was not unexpected given the sensitivity of Mexican consumers’ pork demand to macroeconomic activity, and the lackluster performance of the North American economy for most of this year. Recently however, economic activity accelerated, incomes improved, and demand for U.S. pork products pushed above yearago levels. With the Mexican economy expected to grow at a rate of 3.6 percent in 2004, continued growth of demand for U.S. pork products is expected. The current USDA forecast has Mexican pork imports increasing almost 3 percent next year.

Canadian imports of U.S. pork products through October have declined more than 4-percent over a year ago. Canada remains the third most important export market for U.S. pork products, accounting for 11 percent of U.S. exports so far this year. One explanation for the lower Canadian demand-- despite the lower valued U.S. dollar--is the loss of competitiveness of Canadian pork on international markets due to the appreciation of the Canadian dollar. A loss of competitiveness abroad increases the likelihood that more Canadian pork products are being marketed domestically, perhaps “crowding-out” U.S. pork. In 2004, Canadian demand for U.S. pork products is expected to stabilize and to recover somewhat. USDA forecasts a 4-percent increase in total Canadian pork imports next year.

U.S. exports to smaller Asian countries--South Korea, Hong Kong, and Taiwan--have increased almost 38-percent over the same period in 2002. Together these three countries account for almost 11-percent of U.S. pork exports, and more than compensate for export reductions to Canada. Moderate growth rates of these economies this year, together with the lower valued U.S. dollar, are the likely factors driving import demand for U.S. pork products. Current USDA forecasts have 2004 pork imports of the smaller Asian economies increasing by less than 1 percent.

Pork Imports Increase at 14 Percent Clip

The United States imported 813 million pounds of pork through October, an increase of 14-percent over last year. Canada continues to hold a share of the U.S. import market that ranges between 80 and 85 percent. Denmark accounts for between 10 and 14 percent, with the remainder going to the “Other” category, which includes products from Central and Eastern Europe and the European Union. Given the depreciation of the U.S. dollar against both Canadian and Danish currencies, the rate of U.S. pork import expansion is a bit surprising. But strong U.S. consumer demand for pork products and the sheer size of the U.S. market function as strong magnets for any country with pork to sell.

Live Hog Imports Accelerate

If current expectations are met, the United States will import almost 7.5 million head of Canadian hogs this year, 30 percent more than in 2002. Almost all import categories of hogs have increased, but in particular, slaughter hog imports have increased 18 percent, feeder pigs increased 24 percent, and sows/boars increased 33 percent. What are the major factors that have sent so many Canadian hogs to the United States? In a nutshell, U.S. hog finishers and packers are willing and able to pay more for hogs than Canadian finishers and packers. Low Canadian bids derive from weak slaughter margins that directly result from an appreciated Canadian dollar. The appreciated dollar has made Canadian pork more expensive and less competitive in foreign markets where it competes with lower priced pork from the United States and Denmark, in particular. For a country that exports almost half of its pork production, the appreciation of the “Loonie” (i.e., the Canadian dollar) in 2003 has had unambiguously negative consequences for the Canadian pork sector.

From a Canadian packer’s perspective, the consequences of the high-priced Canadian dollar and lower export demand for Canadian pork products include--but are not limited to--low-tonegative slaughter margins, and reduced slaughter numbers. In fact, three small Canadian packers have declared bankruptcy this year: West Perth Packers, Brantford Packers in Ontario, and Les Viandes Abitemis in Québec. In addition, Springhill Packers recently re-opened with financial assistance from the Province of Manitoba after shutting down for a short period. Bruce Packers in Ontario has ceased operation, after being heavily damaged by fire in early November. Fewer packers mean less demand for slaughter hogs, and more slaughter hog exports to the United States. Moreover, fewer packers can also mean less competition for slaughter hogs, with remaining Canadian packers tending to bid less for hogs and driving more slaughter hogs south to the United States. Fourth-quarter slaughter for major hog producing provinces, through November, is 8- percent lower than a year ago in Manitoba, almost 4 percent lower in Ontario, and about even with last year in Québec. Fourth-quarter hog prices are more than 6-percent higher in Manitoba, 3-percent lower in Ontario, and almost 2-percent higher in Québec.

The Canadian breeding herd also appears to be responding to lower packer demand and lower returns on feeder pigs exported to the United States. Since August, weekly USDA data indicate that U.S. imports of Canadian sows and boars have increased almost 53 percent over the same period last year, suggesting at a minimum, that culling of the herd is taking place.

Weekly Hog Slaughter
Percent change from last year

Links

For more information view the full Livestock, Dairy and Poultry Outlook - December 2003 (pdf)

Source: Livestock, Dairy and Poultry Outlook - U.S. Department of Agriculture, Economic Research Service - December, 2003