The 2018 pork production outlook early this year calling for modest profitability has shifted to losses, said Agricultural Economist Chris Hurt in a weekly outlook from Purdue University.
Higher costs and lost exports as China implements a 25% tariff on US pork Monday were cited as reasons.
HIGHER PRODUCTION COSTS
Rising feed costs are the primary culprit for higher production costs, he said. Since the start of the year, corn futures are about $0.27 a bushel higher, and soybean meal futures are about $55 a short ton higher.
That means feed cost are nearly $3 per live cwt higher: $1.20 because of corn prices and $1.75 from meal prices.
Other production costs also are rising, Hurt said. Energy costs are expected to rise with the government Energy Information Agency forecasting a 9% rise in on-road diesel prices this year and a 7% rise in retail gasoline prices.
The tight labor market also is expected to result in a 3% rise in wages, he said.
Interest rates, too, are rising. The Chicago Federal Reserve Bank reports the average interest rate on farm operating loans in 2017 was 4.9%. A rise this year to 5.9% will be a 20% increase.
CHINA TARRIFFS HURT
For the Chinese, tariffs on US pork appear to be good strategy. China’s 2017 imports were fairly large at $1.1 billion, so it gets the attention of the US.
The tariff will hurt the US pork industry in key states that generally were strong Trump supporters, giving China a potential political victory, he said.
Also, China has been increasing its own production and was expected to import less pork this year anyway, Hurt said. China produced 97% of its own pork last year, and the 1% of their pork consumption they buy from the US can be replaced by the EU and Canada.
But the view is different from here.
The US sold China 525 million pounds of pork in 2017 worth $1.1 billion, 9% of the total export volume. More importantly, Chinese purchases represented 2% of US production.
If the US lost all 2% of its demand represented by Chinese volume, it would be expected to lower US prices by about 4.4%, or around $2.20 per live cwt or about $6 a head, Hurt said. On a carcass basis, this is about $2.75 per cwt.
On a live weight basis, hogs now are expected to average about $48.50 this year with costs estimated near $53, Hurt said. Losses of $4.50 per cwt, or about $12.50 a head, could occur, based on Monday’s lean hog futures.
Current estimates call for losses in every quarter at: 1st quarter -$7; 2nd -$11; 3rd -$5, and 4th -$27.
More trouble over trade issues looms in continuing NAFTA negotiations, Hurt said. While China bought 2% of 2017 US production, Mexico purchased 7% and Canada an additional 2% for a total of 9% that could be affected.
CATTLE, BEEF RECAP
No cattle sold Wednesday on the Livestock Exchange Video Auction, after 166 head sold a week earlier at $125.63 per cwt, down $98.63 from a week earlier.
Cash sales last week ranged from $119 to $121.50 per cwt on a live basis, down $4.50 to $5 from the previous week. Dressed-basis trading last week was around $192 per cwt, down $8 to $11.
The USDA’s choice cutout Monday was down $1.24 per cwt at $219.80, while select was up $1.81 at $210.50. The choice/select spread narrowed to $9.30 from $12.35 with 68 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Friday, was $135.06 per cwt, down $0.66. This compares with Monday’s Apr settlement of $131.87, down $1.45.