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Illinois Pork: TPP, other variables could loosen producer margins

Illinois Correspondent

SPRINGFIELD, Ill. — Pork producers are expected to experience another year of tight margins similar to 2015, according to agricultural economists including Chris Hurt of Purdue University. Increases in beef production (4 percent) and poultry production (approximately 3 percent) will offset modest growth in pork production (1 percent), while weak income growth in some countries could restrict U.S. pork exports, he predicted.
“Margins are expected to be negative for the year with an average loss of about $4 per head,” Hurt wrote in an analysis last month, while urging utmost restraint in expansion plans. “The bottom line is that the pork industry is already expanded enough to drive prices back below costs of production.
“Any further expansion in the pork industry at this time will likely lead to even larger losses." The beef and poultry sectors are also expanding, which means more abundant meat and poultry supplies in 2016.”
In addition, the strong U.S dollar and weak non-U.S. current economic outlook could adversely affect hog and pork prices, Hurt cautioned. But changes are on the horizon that could positively affect margins, if not this year, most likely in 2017, according to the leader of Illinois’ largest pork producers’ group.
“Chris is usually pretty accurate on his projections. I would stay pretty close to these, but there are a couple of variables that could change the market that he didn’t mention,” said Jennifer Tirey, executive director of the Illinois Pork Producers Assoc. (IPPA).
“One thing I thought was curious that he didn’t talk about was the Trans-Pacific Partnership (TPP). We don’t know when it’s going to be finished, but the potential of the market access it could open up, including Japan and Vietnam, could see market numbers going up in the latter part of 2016.”
Tirey said Hurt might not have mentioned the TPP variable in his analysis because it is not enacted yet. She does think the trade partnership is closer to seeing the delivery of the first barge load of U.S. farm products to a participating Pacific nation than many believe.
“I think this is one of those projects (President Obama) is wanting to build his legacy on. So I think being an election year and his last year, we are hopeful we will see (TPP) finalization in the springtime,” said Tirey. “It’s just a matter of when that market access will open up. We might not actually see anything until 2017, but our industry is hopeful things could change a little earlier than that.”
Hurt said pork exports should increase by around 4 percent along with steady imports, helping prices in 2016. “However, the strength of the U.S. dollar will likely be a continued shadow over improved pork trade ... providing headwinds against improved trade as USDA now forecast,” he wrote.
Tirey and IPPA membership is hopeful for an even stronger export percentage increase in 2016 than Hurt predicts, based on possible TPP implementation and expected new volume records for pork sales to Mexico and elsewhere.
“Even though our numbers are down and almost flat for 2016, we set new volume records in Mexico for the fourth year in a row (in 2015). Mexico continues to be a bright spot for exports,” said Tirey, whose claims are supported by the U.S. Meat Export Federation’s annual red meat export report for 2015.
Through October, pork exports to Mexico were up 5 percent in volume, though down 20 percent in value due to lower prices for ham and other specific pork products. In addition, the report noted demand in South Korea for U.S. pork had increased 30 percent in volume and 16 percent in value.
Add to that a potential new market in Cuba, and the reasons behind Tirey’s optimism for positive 2016 pork margins become clearer.
“We’re definitely in tune to Cuba,” she said. “We support the efforts of the Illinois Cuba Working Group and we hope to see access open up there, as well. Cuba is another potential bright spot, but another unknown variable right now.”
A quicker-than-expected recovery from the porcine epidemic diarrhea virus (PEDv) was one factor that led to U.S. expansion in 2015, helping push down hog prices. Since March 2015 there has been little impact on slaughter numbers due to PEDv, Hurt noted, with pigs-per-litter setting new records quarterly.
Prices were depressed by a 7 percent production increase, on a combination of 8 percent higher numbers and 1 percent lower weights, Hurt said, leading to prices that fell to six-year lows and were well below costs of production.
“Producers planned for the worst and luckily didn’t get it,” Tirey said of farmers’ farrowing intentions in 2015, after PEDv reached its zenith in 2014. “So the market was kind of flooded, and that’s one of the reasons we won’t see a large increase this year.”
Consumers, however, will continue to see lower checkout prices for pork at their supermarkets at least through 2016, Hurt predicted.
“For the year, live weight hog prices are expected to average in the higher $40s after averaging near $50 in 2015. First-quarter prices are expected to average in the mid-$40s before moving upward to average in the low- to mid-$50s in the second and third quarters. Prices are then expected to drop to the mid-$40s for the final quarter,” he wrote.
Supporting Tirey’s optimism for better pork margins is major agribusiness lender CoBank, which announced on Jan. 21 the supply glut that plagued U.S. pork, beef and poultry industries and ratcheted down margins in 2015 is expected to ease in 2016.
Leading indicators point to animal protein supplies transitioning toward a better balance in the marketplace, with stocks more in line with overall demand, said Trevor Amen, animal protein economist with CoBank.
“It’s clear that in the coming year, the headwinds and adverse conditions created by excessive protein stocks are clearing,” he said.
“Surprisingly strong U.S. consumer demand helped lay the groundwork for improving market conditions in the coming year, combined with the fact that the net trade balance is expected to shift toward growing exports and fewer imports.”
Tirey urged producers who are interested in a market update to attend the IPPA’s annual Illinois Pork Expo Feb. 16-17 at the Prairie Capital Convention Center in Springfield.
Market analyst Steve Meyer will deliver a market outlook for grain and hog prices on the second day of the Expo. For more information, visit