The 2018 outlook early this year was for modest profitability. Now, it has shifted to losses. The reasons are clear: higher costs and lost exports due to a 25 percent tariff on U.S. pork implemented by China yesterday on April 2.
According to Purdue University agricultural economist Chris Hurt, several forces are driving costs higher, but feed is the primary culprit. Since the start of the year, corn futures are about 27 cents per bushel higher and soybean meal futures are about $55 per ton higher. This means that feed cost are nearly $3 per live hundredweight higher, $1.75 of which is due to higher meal prices, and the remainder of which is due to the corn price.
Other costs of production are rising as well. Hurt explains that energy costs are expected to rise with the Energy Information Agency forecasting a 9 percent rise for on-road diesel prices this year and a 7 percent rise in retail gasoline prices.
“The tight labor market is expected to result in a 3 percent rise in wage rates, and interest rates are also rising,” Hurt adds. “The Chicago Fed reports the average interest rate on farm operating loans in 2017 was 4.9 percent – if that rate rises by 100 basis points this year to 5.9 percent, that is a 20 percent increase.”
Finally, the Trump tariffs on steel and aluminum will likely put upward pressure on metal prices that are important to buildings and equipment used in pork production.
The impacts look different from the Chinese side versus the U.S. side of the trade dispute. Hurt explains that for the Chinese, tariffs on U.S. pork appear to be a good strategic decision. Chinese pork imports were fairly large at $1.1 billion last year, so it gets the attention of the U.S. quickly as retaliation.
“The tariff will hurt the U.S. pork industry in key states that were generally strong Trump supporters, which gives a potential political victory to China,” Hurt says. “In addition, China has been increasing their own domestic production and was expected to import less pork this year anyway.”
China produced 97 percent of their own pork last year; the 1 percent of pork they currently buy from the U.S. can easily be replaced by pork from the European Union and Canada.
“If China buys no U.S. pork, it only has small implications for them,” Hurt explains. “While China seems to have chosen well by selecting pork for these tariffs, the negative implications are deeper for the U.S. pork industry. The view looks different from the Midwest pork center.”
The U.S. sold China 525 million pounds of pork in 2017, worth $1.1 billion. This was nine percent of the total export volume last year, but Chinese purchases represented only 2 percent of U.S. production. If we lose all of these sales, that could lower U.S. prices by about 4.4 percent, $2.20 per live hundredweight, or about $6 per head. On a carcass basis, the loss would equate to about $2.75 per carcass hundredweight.
“The 25 percent tariff will make our pork higher priced in China allowing pork from the European Union and Canada to be cheaper than U.S. origin,” Hurt adds. “We can anticipate losing most of the export business with China.”
“This is a measure of the biggest potential impact on prices, but the actual price reduction will most likely be less,” Hurt explains. “U.S. pork prices will drop due to the Chinese tariff and these lower U.S. prices will help sell some added pork domestically.”
In addition, the increase in EU and Canadian export volume to China means they will export less to other countries. Hurt says the U.S. could pick up some of that export business. “The point is that even if the U.S. lost all of the Chinese business, there will be some compensating increases in the volume sold domestically and to some alternative export destinations.”
According to Hurt, the outlook has weakened. On a live weight basis, hogs are now expected to average about $48.50 this year with cost now estimated near $53. Losses of $4.50 per live hundredweight or about $12.50 per head are expected. This hog price forecast is based on lean hog futures for the rest of the year on April 2. Current estimates are for losses per head in every quarter of 2018 are: 1st quarter -$7; 2nd -$11; 3rd -$5; and 4th -$27.
In addition, Hurt adds that more trouble over trade issues for the pork industry may loom in continuing NAFTA negotiations. While China bought two percent of U.S. production in 2017, Mexico purchased 7 percent and Canada an additional 2 percent. That is 9 percent of U.S. production that could be affected in NAFTA talks.
“The trade hammer has fallen on the U.S. pork industry,” Hurt says. Uncertainties surrounding NAFTA remain a grave concern as well.
“There remains much to be worked out in the early stages of these trade conflicts and U.S. agriculture must continue to argue for the merits of freer and fairer trade.
“If the current outlook shift toward losses prevails, all expansion projects still currently on the drawing board should be reconsidered. Further, if the current negative outlook prevails, some downsizing of the breeding herd into 2019 may be needed to move supply downward to provide breakeven prices,” Hurt concludes.
Source: University of Illinois