Domestic Chinese production is the wildcard

U.S. pork producers have found themselves in something of a predicament in recent years. The United States has an expanding pig population and sows are more productive than ever. All of this has put downward pressure on pig-meat prices and producers’ margins. Cheap grain prices have lowered feed costs for the producers—a positive development—but these lower costs have motivated them to expand, perhaps unadvisedly, accelerating the cycle of expanding inventory and lower prices.
Robust export markets have kept the U.S. hog industry afloat for the last few years, and exports to China, in particular, have expanded rapidly in the last two years, greatly benefiting the domestic industry. As China’s economy has grown, demand for protein has boomed. China now consumes about half of all the pork produced globally, and its domestic industry comes nowhere near satisfying that demand.

China Pig Production & US Exporters

But is there a cloud looming above this silver lining? U.S. exporters have a number of concerns. For one thing, Chinese economic growth has slowed in recent years, leading to the possibility that demand for pork among Chinese consumers will flag. We’ve already seen small signs of that happening, but they have been attributed until now to higher pork prices in China, not to any lack of hunger for pig-meat among the Chinese.

Then, there is the state of China’s pork-producing industry. These days, most Chinese domestic pork is produced inefficiently by small-scale farmers and their production has actually decreased in the last two years. But some experts contend that this decline in Chinese domestic production—which has boosted imports—is thanks to a government investment program which aims to consolidate and streamline the domestic industry, allowing it to produce more. If that program is successful, it’s possible Chinese requirements for imports will drop—even without a decrease in domestic demand for pork. The question which then will bedevil U.S. producers will be what to do with all their extra meat.

So far this year, U.S. pork exports continue on the upswing. Pork exports reached 197,025 tons in February, up 15% year-over-year, with value up 17% to $486.7 million. For the first two months of 2017, exports totaled 399,692 tons, up 18%, with value increasing 22% to $995.3 million.

U.S. pork exports in March reached 229,000 tons, 16% over February’s numbers and 17%, the 195,000 tons exported in March 2016. February exports accounted for 27.6% of total pork production, up from 23.8%.

Mexico remains the biggest U.S. pork export market but China (including Hong Kong) continued to take large volumes of U.S. pork in January and February, totaling 42,881 tons, up five percent year-over-year, valued at $83.2 million, up 12%. Two-month totals were up 10% in volume and 15% in value. China’s total January-February imports were up 35% from last year’s record pace at 532,600 tons.

“With trade deficits being a hot topic of conversation, especially with countries such as China, it’s important to highlight the sectors in which U.S. exports are thriving,” said Philip Seng, CEO of the U.S. Meat Export Federation. “Larger U.S. production has opened further export opportunities and generated positive returns for the entire supply chain.”

What’s Next?

That is likely an accurate snapshot of the current situation, but analysts are looking to possible future developments. Justin Sherrard, an animal protein analyst at Rabobank, believes the market in China will continue to be favorable for U.S. pork exporters through the second quarter of this year, but he isn’t willing to commit beyond that.

“Steady, regulatory-driven relocation of pork production will support good price level and stabilize imports in the coming months,” he said. “Chinese local supplies will start to recover in the third quarter, as investments that have been made in the past few years will be coming online.”

In other words, the worst possible news for U.S. pig exporters could be coming about—an increase in domestic Chinese pork production—and that rather soon. That should set U.S. pig producers on edge, especially in light of Rabobank’s estimate that U.S. inventory in March stood at six percent above last year’s numbers. Prices are still profitable, according to Sherrard, but are disappointing previous expectations. A decrease in exports to China would put further downward pressure on prices and profits unless U.S. producers do something to correct the situation. But as of this point in time, that doesn’t appear to be the case, with new plants coming online and hog numbers continuing to grow.

“This has added a good deal of volatility to hog prices,” said Sherrard, “which we expect to continue as two sizable pork plants come online” at the end of the third quarter of this year. “We expect U.S. pork supply to increase by three percent to four percent in 2017, which will require exports to keep the upward trend started in the first quarter in order for producers to enjoy another profitable year.”

But Sherrard’s own analysis is noncommittal on that score with the possibility of a boost in production among China’ domestic industry. In short, the trajectory of U.S. pork exports to China remains a wild card.

How U.S. pork producers will fare for the rest of this year and beyond involves a number of moving parts. There’s the expected increase in U.S. domestic capacity later this year and the as-yet unknown results of China’s reorganization program, raising the possibility that Chinese requirements for U.S. port exports will plummet.

There are other markets U.S. exporters can look to. Export volumes to Mexico, which accounted for one-third of total U.S. pork exports, grew 30% in the first two months of this year. Japan took in 14% more U.S. exports in February by volume and up 18% by value. Pork exports to South Korea gained 26 percent by volume and 29% by value in February. Observers note strong demand in both of these markets. But whether growth in these three markets can make up for a downturn in the world’s biggest market, only time will tell.