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DAVID KRUSE

By Staff | Oct 14, 2016

USDA’s Sept. 30 Pigs and Hog report answered the question that I said would be most concerning – how long were the historic market hog numbers that we are seeing coming to slaughter going to last?

The answer was too many hogs for too long. Industry kill capacity will be tested and the industry will have to adopt some crisis-management measures in order to avoid another 1998-like market crash.

It was like producers heard that TPP had been successfully negotiated and they were building a new hog plant in Iowa, while planning another the following year and all decided to breed a few more sows.

The problem is that more hogs led the construction of additional kill capacity, like that was going to work.

Farmers want hog buildings to sell pig spaces to integrators and there must be no limit on how many pigs are covered by sweetheart deals between the large commercial producers and packers as farmers have had no trouble finding commercials who want to own pigs to contract buildings with them. Farmers get the manure.

Integrated producers have a leg up on hog producers as it is one thing to overwhelm kill capacity and ruin the price of hogs, but yet another to overwhelm the pork market so that pork loses money.

Integrated producers have been able to sell pork for enough profit to offset losses of the hogs they produce. This time however, we have beef producers expanding production and the broiler chicken industry with the inside straight on consumer demand all challenging each other for more market share.

Integrated producers have a vested interest in adding enough to pig production so that there is always one hog too many. The structure is to their advantage.

The hog industry has never actually shown much restraint relative to production even when losing money. It is always in expansion. Technically it could liquidate a few sows each year and still produce more pigs because of productivity gains, so when they add sows on top of productivity gains they produce one heck-of-a lot of pigs.

This propensity to produce more pigs was curtailed, if not temporarily contained by PRRS and PEDv. As these viruses were controlled, it removed the governor on the throttle and the industry productivity took another surge forward.

I have always believed that while PRRS and PEDv caused individual losses that they helped make the industry profitable over-all saving it from overproduction.

USDA obviously lost the ability to accurately count pig numbers in this evolved industry structure. Somewhere along the line it lost track undercounting the small pigs by 3 percent between the June and September reports. So we have a short term problem in the hog industry suffering from the market fallout resulting from exceptional industry productivity relative to kill capacity but there is a larger problem that is potentially even more serious.

According to USDA, the U.S. became a net pork exporter in 1995 and since 2000 pork exports have increased 11-fold. The USDA said the growth spurt started with NAFTA. Hog economist Ron Plains wrote, “The value of pork and pork byproduct exports has grown from $1.97 per hog slaughtered in 1986 to $62.45 per head slaughtered in 2014. For more than 25 years prior to 2014, Japan was the largest foreign buyer of U.S. pork.

“In 2014 Mexico replaced Japan as the largest U.S. pork customer, purchasing 28.4 percent of our exports. Japan purchased 25.3 percent of our exports. Combined, these two countries purchased 11.4 percent of total 2014 U.S. pork production. Canada and South Korea are third and fourth in pork purchases from the U.S.

“To calculate the effect of imports and exports on the price of hogs, using a demand elasticity of -0.3, we assume a 1 percent increase (decrease) in net exports as a share of total U.S. pork production will result in a 3.33 percent rise (fall) in hog prices. We also assume that changes in pork trade are not anticipated and any herd size change due to price changes are fully accomplished in 12 months. The total income of all U.S. pork producers has been improved by $9 billion over the last 29 years due to the increase in net exports.”

Mexican demand currently makes the market for U.S. ham. So the hog and pork industry growth has been predicated on export growth which has been driven by trade agreements. – NAFTA, WTO, Chile, Singapore, Australia, Peru, CAFTA, Korea, Columbia, Panama and the best one ever for pork export prospects, according to ISU, pending in the TPP.

Expansion without export growth is the apocalypse for this industry.

TPP is dead on arrival in the current political environment. Donald Trump often vacillates between morning and night policy statements and has proven that he listens to no one but the voice in his head.

His campaign is an existential entity almost unrelated to Donald Trump on policy.

We do know one thing for sure. Trump’s trade policy as he has promised rally after rally that he will implement is directed at our primary pork trade partners. The certain trade retaliation would literally destroy exports, decapitating demand growth for the hog/pork industry. If you don’t believe that – then go ahead, breed some more sows.

By the way, the cost of government regulation, reviled by the pork industry, is calculated to be in millions or dollars, while the cost of lost pork trade would be calculated in billions.

The industry can survive regulation, but the loss of exports markets, likely not.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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