2023 WPX: ADM outlines the economics of the pork industry at the seminar

July 10, 2023

4 minute read

Mark Schweitzer, vice president of global economic research with ADM, spoke with The Pig Sites Sarah Mikesell shortly after the World Pork Expo about the economics of the US pork industry. Below is an abbreviated version of the discussion.

Can you share some highlights from ADM’s corporate seminar focusing on the economics of the pork industry at the World Pork Expo?

There’s no question that the main topic of conversation at the Expo was the current state of the economy in the hog space. When you look back and think about the years of expansion in the hog space in the US market that led to an industry with oversupply, coupled with slowing demand, slowing economies, rising costs, and new regulations. It’s been a really tough road for producers. The entire value chain through pig production experienced something of an economic disruption last year.

One of our panelists, Dr. Dermot Hayes, an economist at Iowa State University, presented a really cool slide. He estimated the yields of Iowa hogs farrowing to the bottom for this year, and even made a forecast that extended to 2024. But unfortunately, we matched the lows that were made in 1999 in his facility forecast. of margins actually shutting down in early 2024 with expected losses. It looks like perhaps the worst $55 to $60 per head loss in central Iowa may be behind us. However, we still have a tough road ahead of us as we move into 2024.

What are the prospects for the rest of the year?

When you think about where we are today and where we’re headed, it certainly seems like it’s going to get the industry up to 2024 at the right size. In other words, to bring supply into balance with demand, it’s going to take some pretty severe stock reduction actions, somewhere from 5% to 6% again to reduce sow size to get us to that point. equilibrium. So how long will it take to liquidate these stocks? It’s probably going to be fine in 2024, so we still have some time to deal with that.

Are we seeing a cyclical correction?

Absolutely. It’s so easy to focus on the headwinds and talk about the obvious. We talked about too much production. There’s climate uncertainty in the US, which perhaps doesn’t lead to lower feed costs due to the acute drought we’re experiencing and the uncertainty in commodity markets that we’ve seen over the past 10 days. Additionally, higher prices, the complexity of Chinese trade and tariffs, US interest rates, a slower economy in the US and globally, the federal and state regulations we are seeing crop up, and of course the conflict in Ukraine, it’s all headwinds we’re facing. It’s easy to focus on those and say there’s no end in sight. But when you go back and look at some of the data from 1999, when US industry was down to a $50 to $60 per capita loss at Farrow’s end, one of the positives to focus on is that if a manufacturer pays attention and can control the financial health of their balance sheet and are prepared to delay any expansion or restructuring and can properly size their business based on the demand that they are seeing which is key to being able to make it through this downward cycle. Everyone talks about 1999, but what happened after 1999? We had some really good years that followed, and it sure looks like once we get this market right sized, we’ll be able to get some tailwind for producers and get into this plus $30 to $40 per capita for Farrow-to-finish along the way.

What’s interesting is that when you look at the beef cycle, the beef cycle is totally opposite to what’s happening right now with the hog cycle, which is extremely rare. The price of beef is going up, but we are compressing on pork prices. At the start of the year, the USDA came out and said we’re at a low of 61; we haven’t been here since 1962. That’s probably a good thing for pork because if we keep beef prices higher, that helps us as we bounce back to support higher pork prices as well.

What are some things manufacturers could do right now to ease the economic pressure they’re feeling?

They’re the experts in their operating space — they’re doing a great job paying attention to their earnings rate and feed costs. If I’m a producer, the only thing I watch is renovations. Any kind of delay in any capital expenditures would be prudent at this time. You need to maintain the financial health of your balance sheet and keep your debt ratios low. Try to get to the next cycle and beat the lows/lows so you start getting tailwinds and then you’re in that $30 to $40 range. Consider everything you can do to preserve the financial balance. Each operation is so different; it’s almost limitless the things you can do. You just need to find any losses or exposures in your trade.