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Balancing an Unstable Hog Market

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Bull markets, bear markets, strong demand, and supply chain disruptions – the last 14 months have been a market roller coaster.

As a producer, how can you manage the risk of volatile markets? Experts from Partners for Production Agriculture (PFPAg), a well-rounded brokerage, consulting and marketing firm based in Ames, Iowa, share their thoughts and insights on risk management.

Four Key Issues Impacting the Pork Industry

Dr. Steve Meyer, an economist at PFPAg, says these four key issues have the potential to affect the pork industry for the remainder of 2021 and into 2022.

1. Demand

  • Q: Will the current market continue to be demand-driven?
  • A: Much can transpire the rest of the year. Retail sales surged during COVID-19 and the shift to retail and away from foodservice has had some apparently lasting positive impact on pork demand. Domestic per capita pork availability will be slightly lower this year versus 2021 but retail prices are very strong. In fact, they are strong enough to conclude consumer-level demand is up from last year. Real per capita expenditures for pork, a measure of consumer level demand, are up 5.1% year-over-year through June.

2. Exports

  • Q: As China recovers their sow herd, will exports slow or are there new markets to tap into?
  • A: Exports to China will almost certainly be significantly lower this year. However, there are many pieces of conflicting information regarding domestic Chinese pork output. China was the industry’s top customer in 2020 but will not likely be so this year as shipments to Mexico, Japan, Korea and Philippines grow. In total, PFPAg expects exports to be slightly lower in 2021 but still the second highest total ever. Exports to China will be lower.

3. Hogs and Pigs Report Numbers

  • Q: Will the herd continue to grow despite rising feed costs, gilt availability and higher prices for building materials?
  • A: Producers limited the number of pigs they produced as a management decision during COVID-19 related slowdowns and shutdowns of packing plants. The U.S. breeding herd was also reduced by 256,000 animals from December 1, 2019 to March 1, 2021.  While the herd is smaller, the industry must realize the genetic potential of this herd to produce piglets is still growing. Should management objectives return to raising every possible pig to market weight, hog slaughter and pork production could grow rapidly.

4. Costs

  • Q: How will current and future feed ingredient prices affect producer decisions moving forward?
  • A: The cost estimates, which are based on parameters from the Iowa State University Estimated Costs and Returns series, would put breakeven costs for farrow-to-finish operations in the mid- $80 range, the highest since 2013 and the fourth highest ever. Drought conditions in the northwestern corn belt have limited yields but the eastern corn belt appears poised to harvest record crops. Significant increases in the value of soybean oil (driven by regulations favoring renewable diesel in California) have allowed soybean meal prices to remain somewhat in-check despite higher soybean values. This pattern may continue, giving some respite for hog producers.

Steve Meyer, an economist for PFPAg, shares key issues that could affect the pork industry.

Proposition 12 Requires Timely Conversations with Packers

Proposition 12 standards are looming at the forefront of pork producers’ minds. Many are wondering whether transitioning their sow operations to the 24 square foot per breeding animal ages 6 months and older is worth the barn retrofitting and increased production costs. According to Mike Porth, chief operating officer of PFPAG, producers and packers alike must weigh the pros and cons of adjusting production from a premium standpoint.

“The premium for meeting Prop 12 standards on their operations is expected to be anywhere from $4-8 per head, which is probably the most feasible in a four-to-five-year agreement,” Porth says.

Having a positive working relationship with the packers is essential to finding the best solution to new industry challenges and opportunities.

“Producers, you need the packers, and packers, you need the producers,” says David Delaney, director of marketing for PFPAg.

CME Pork Cutout Contract Overview

As the market constantly changes with the ebb and flow of demand, Billy Polovin, a trader for PFPAg, discussed the Pork Cutout contract that started trading in November 2020.

Producers can hedge any hogs priced off the cutout value and potentially hedge a meat margin. It provides direct hedge revenues to packers and more accurately hedge prices of individual cuts to both themselves and buyers/end users.

Billy Polovin, a trader for PFPAg, shares an overview of the CME Pork Cutout contract.

Livestock Insurance Policies for Producers  

Tyler Patten, a trader for PFPAg, shares the differences between the two types of livestock insurance.

Livestock Risk Protection (LRP)

LRP manages the risk of falling hog prices. It is an easy-to-understand product with no upfront fee, allowing producers to let the market play out before paying. Premiums are subsidized by USDA’s Risk Management Agency (RMA), but LRP is limited to 150,000 head per year per entity.

Patten explains the Livestock Risk Protection program, which helps manage the risk of falling hog prices.

Livestock Gross Margin (LGM)

LGM covers the risk of falling hog prices and rising feed costs. It requires no upfront fee, with attractive pricing also subsidized by RMA. There is no limit to the number of pigs that one entity can cover.

The Livestock Gross Margin program covers the risk of falling hog prices and rising feed costs, says Patten.

The requirements for both are farms must be conservation compliant with form 801026 through the Farm Service Agency and prove they are marketing at least 75% of their hogs.

Assess Risk Management Moving Forward

“The opportunities lost or made utilizing risk management must be assessed,” says Karl Hoffman, a trader from PFPAg. “These are the tools that really need to be focused on as we move forward because they are ways you can navigate these very volatile times and still be able to participate.”

Below are links to more risk management resources for producers:

* External links developed by third parties do not necessarily represent the views of the National Pork Board.

 

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