Has the North American pork industry turned the corner?

by Christine McCracken, Senior Analyst – Animal Protein, Rabobank

Photo credit: Miha Creative - stock.adobe.com

After more than a year of financial losses, the North American swine sector is finally turning a corner.

The gradual reduction in the sow herd in both the United States and Canada, along with lower feed costs, is helping the hog industry return to profitability.

While it could take several months to fully restore industry balance sheets, producer margins are moving in a positive direction. In other words, the industry appears to have weathered the worst of the cycle in 2023.

Key to this reversal of fortunes is a drop in production costs from the peak levels experienced last spring and summer.

Record-large crops in the US and South America have restored global grain and oilseed inventories, helping to reduce the cost of corn and soybean meal. The recent moderation in commodity prices dropped the cost of production by $11/cwt, or roughly 22 percent, versus the 2023 highs and helped the industry return to profitability.

Yet despite this improvement in feed expenses, the industry is still facing record-high production costs as labor, insurance, and financing expenses remain elevated.

Higher sow mortality and newly-instituted sow housing regulations in California and Massachusetts are also adding to producers’ financial burden and pressuring margins. Unfortunately, many costs remain structurally higher, forcing the industry to look for continued efficiency gains.

North American pork supply grew slightly ahead of demand during 2023, with gains of one and three percent in the US and Mexico, respectively, and a slight two percent decline in Canada, putting pressure on cash hog markets.

To bring the markets back into balance, the industry began to reduce its sow herd and slow down production. However, reductions have, to date, been slow.

Canadian producers have taken the most proactive approach, reducing the sow herd in the east after poor returns forced the rationalization of packing industry capacity in the second half of 2023. Industry-led initiatives to fund semi-permanent production cuts in Québec in 2024 will have a more pronounced impact on production in 2024.

Historical Industry Returns, By Segment – 2004-2024f. Source: Rabobank, 2024

Industry rationalization in the United States has also been slow, with only the most geographically or health-challenged systems exiting in 2023.

Efforts to reduce the sow herd continued in early 2024 to better align supply with demand, although progress is slow.

Part of the issue is that many of the larger systems have relatively solid balance sheets, and they continue to be opportunistic buyers of financially stressed assets.

Further consolidation of industry capacity with few large-scale exits will, in our view, limit (but not eliminate) herd reductions throughout 2024.

Hog slaughter is running slightly ahead of expectations to start the year, as pig supplies were considerably higher through the second half of 2023.

Some late winter and early spring US herd health challenges will likely constrain hog supplies later this summer and early fall, a reality helping to drive the seasonal rally in US hog markets.

Pork demand ended 2023 on firm footing in both domestic and export markets and should improve through 2024.

While the US and Mexican economies appear to have avoided a technical recession thus far, Canada fell into negative territory late in 2023. Although markets are holding up better than most economists expected, many North American consumers are struggling financially as they face ongoing inflationary pressure and economic uncertainty.

Despite this outlook, there has been only modest pressure on pork consumption. The market has been able to absorb larger pork supplies at higher prices in early 2024, reflecting good demand not only for retail cuts but also for processed pork items. Pork remains a more affordable protein choice (especially compared to beef), and the trend toward more at-home meal preparation is helping to stabilize retail pork demand. Good promotional activity for pork at retail is also helping boost sales volumes early in the year.

These trends are set to extend through the summer months as North American consumers continue to seek out lower-cost protein alternatives and demand improves seasonally. The strength in domestic pork values has helped packers offset higher hog and labor costs, sending commodity pork margins back to the historic average.

Exports are also expected to remain a key driver of strength in North American pork markets in 2024. While US pork may have a tough time surpassing the record eight percent YOY growth of 2023, shipments are already off to a strong start. US pork remains attractively priced, benefiting from its close proximity to Mexico and the strong market for fresh pork.

Conversely, Canadian pork exports were down four percent in 2023 but appear to have stabilized in 2024.

Rabobank expects steady export demand for North American exporters in 2024, acknowledging the risks of slower economic growth in key export markets like Japan and China and rising geopolitical tensions. Growing competition from rising pork supplies in Brazil and the EU will also make a repeat of record US exports in 2024 more challenging.

Stronger North American pork markets and lower feed costs will provide some breathing room for the industry in 2024, but structurally higher costs of production and growing regulatory pressure will leave little margin for error.

Only the lowest-cost operators with strong risk management programs and good system health will thrive long-term. Strong relationships with your packer are no longer optional and will likely mark the difference between success and failure in the long term.

RaboResearch F&A North America provides dynamic insight and value to pork industry members and other Rabobank clients and stakeholders.

You may learn more about the exclusive research reports for a competitive edge at https://www.raboag.com/raboresearch/overview-125.

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Christine McCracken

Christine McCracken, Senior Analyst for Rabobank conducts animal protein research for North America. She is a member of the RaboResearch North American team who monitor and evaluate market events that affect food and agriculture to help clients navigate the ever-changing sector landscape.

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