2023 Hog Outlook is Encouraging

US Pork consumption per capita is expected to be 51.4 lbs in 2023.

by Moe Agostino

Despite continued (and growing) concerns about a recession, the outlook is positive for North American hog producers in 2023.

First, US red meat production is expected to fall by 3.7 percent. Secondly, pork production is falling in Europe, Asia, and Russia—which when taken together could cause Chinese pork demand and North American pork exports to surprise to the upside. Less pork usually means higher prices!

The potential (and pent-up) demand from China remains a wildcard, but a wildcard that could soar. Because of the Covid lockdown within China, over the past three years, consumers there have amassed $2.6 trillion in savings. If they spend $400- to $600 billion, it could add 0.50 to 0.75 percent to the global GDP (gross domestic product).

US pork production is clearly in decline or contraction as elevated feed costs, disease issues, rising interest rates, high construction, and replacement costs should continue to keep a lid on the US breeding numbers.

There is large-scale consolidation occurring within the hog industry in the face of contraction, with market hog numbers down nearly six percent from the recent highs in 2020.

There is a sense that US packers are worried about not having enough company-owned pigs to run through their slaughter plants. However, instead of investing in new expansion in breeding stock, buildings, equipment, and labour, the packers are simply buying out large independent producers for their stock.

Seaboard Foods The Maschhoffs, LLC. These hog inventories are derived from areas within the central US.

It is important to note that consolidation is not expansion as these large, independent producers are willingly exiting the business.

Unless elevated corn prices decline substantially, which may not happen for three to five years due to the 89-Year Drought Cycle (aka the Gleissberg Sun/Solar Cycle) that we are currently in, and that could peak in 2025 - one should not expect any kind of expansion in hog breeding numbers any time soon.

Despite higher meat prices, a continued strong labour market, and an unemployment rate that remains historically low, the US consumer is soldiering on. Consumer spending in the US during January was much higher than expected at five percent—a level that last seen in August of 2022.

Wage growth has not kept up with inflation, but we have yet to witness a substantial downturn in economic activity. As such, we just may see “no landing” as the US grows at two percent (as it did during the past three Covid years).

However, rising interest rates and elevated prices for housing and groceries could further impact real and disposable incomes for consumers, which could contribute to weaker pork demand.

chart productivity in US hog herds 2004 - 2022
Photo Credit: WholeHog

US pork demand also stands to benefit from the large liquidation that has occurred within the American beef sector. Drought conditions on the western to southern US Plains have impacted over half of the US beef herd.

Tighter supplies (less availability) in 2023 and 2024 with higher beef prices (supply means higher prices) will support consumer demand for alternative proteins, which should include pork.

The per capita US pork consumption is expected to average 51.4 pounds in 2023 versus 51.1 pounds in 2021.

Continued management of diseases with advancements in technologies will also be crucial moving forward. Some examples include sensors that can recognize unusual animal movements and predictive technology to provide an early-warning system to farmers to limit herd loss.

hands holding package of pork in grocery store aisle
Photo Credit: Sergey Ryzhov - stock.adobe.com

Disease continues to reduce the hog herd as US productivity continues to decline with a pig per litter having peaked at 11.

2022 was Pretty Good

A higher-than-expected demand in 2021 and 2022 saved the industry’s bacon.

In 2022, the average profits of $15.67/head made it the second-most profitable year since 2014.

As well, the average cost of production (live weight basis) in 2022 broke a new record at $71.41/cwt, according to Iowa State University.

While profits were up in 2022, the cost of raising hogs in the US increased by 21 percent from 2021, and by 43 percent compared to 2020 data, according to estimates from Iowa State University Extension and Outreach.

Feed costs increased 24 percent while other expenses such as labour, transportation, and energy were 18 percent higher than last year.

Although Interest rates are not expected to come down until 2024, producers will eventually be able to refinance their operations at lower rates and offset higher building costs.

We expect that margins will be squeezed again in 2023, but producers will have opportunities to lock in with higher profits as long as they can remain focused on managing input costs such as feed. In this case, the best offense is a good defense.

In the near-term, soybean meal prices have soared to ration-demand levels as the drought being experienced in the biggest global meal exporting nation – Argentina - has nearly cut the country’s soybean production in half.

In the longer term, an increase in US biodiesel production including the opening of new plants will divert more of the domestic crush to soy oil, which will in turn raise soybean meal supplies and reduce meal prices.

However, it is important to note that this could lead to more competition for acres which potentially could reduce future US corn acres and drive corn prices higher.

As noted, we are expecting a lower US hog production in 2023, and no economic recession - but export demand should remain strong.

If China’s exports begin sooner than expected, you should not be surprised to see - perhaps by June, July, and August of 2023 - lean hog futures trading north of $120 by late Spring.

Maurizio “Moe” Agostino

Moe is chief commodity strategist with Farms.com Risk Management. He has over 42 years of experience in commodity risk management, the last 20 years with Farms.com Risk Management. Moe the “Marketing Man” is an expert in forecasting grains, basis, livestock, feed, futures/options, energy/diesel, fertilizer/input purchases and both technical and fundamental analysis with a global and local market perspective.

Farms.com Risk Management Inc. is an agricultural commodity marketing and price risk management provider for North American farmers, producers and agribusiness. The goal for the Farms.com Risk Management team is to maximize producer profitability while reducing risk by providing in sight with a daily Commodity Report and a marketing app for smart phones 24/7. Visit RiskManagement.Farms.com for more information.