A lot at play for the hog sector

Very strong prices could be in the cards if demand holds.

 

Steve Meyer, National Hog Farmer 

Nov 15, 2021

 

A few comments about several things.

 

First, USDA finally took action to restore the pork packing capacity lost when a Minnesota judge set aside the increased line speed feature of the New Swine Inspection System (NSIS). USDA announced a “one-year trial” for the nine plants that had been approved under NSIS and solicited plans from each plant on how they would implement the higher speeds. The plans have to include programs to assure worker health and safety that will meet OSHA scrutiny and must include input from the plant’s union or Work Safety Committee.

 

I understand that two of the plants might submit their plans as early as this week and that USDA has promised to review the plans quickly. No one will address a start-up date, but those statements lead me to believe that those two plants may get the go-ahead before the end of the year. That doesn’t mean they will be able to speed up by then as labor availability could still be an issue. But it is progress, and I have to compliment USDA on progress.

 

What does this mean? The slowdowns cost the industry about 85,000 head per week in throughput potential. Remember that the sector lost and additional 50,000-54,000 per week when Smithfield ceased slaughter operations at Gwaltney, Virginia. The Gwaltney plant is not coming back, but the restoration of the 85,000 head per week would push 5.4 days/week capacity back above 2.71 million head. If it could be operational tomorrow, it would allow packers to comfortably handle this year’s peak supplies.

 

But the big impact may be next fall. While nothing has been easy in the production segment since the beginning of 2020, ISU’s estimated costs and returns indicate that profits have been strong. The potential for strong profits next year (see below) and some cash in hand suggest expansion can’t be far away. Sow slaughter levels support that conclusion, but higher hog numbers will not likely come until Q3 2022. My calculations say we’ll need more capacity next fall, and the only way to get it is to speed up the plants. Will the “one-year trial” be successful? I’d bet on yes as everyone gains if they are. And we may not gain just the 85,000/week back but may gain more as two plants (Ottumwa, Iowa and Madison, Nebraska) that had not actually operated at enhanced speeds before the court ruling may do so by next fall.

 

This is all good news. I wish it had happened quicker, but I’m thankful it is happening now!

 

Our friend Dennis Smith argued last week for explosive prices in 2022 based on tight world supplies. His logic is sound as China has been a mess and has caused the EU to be a mess. And when things are a mess, supplies often decline. The question is one of degree and whether U.S. producers will stay where they are or expand. You know from above that I expect some expansion – primarily due to a return to robust productivity growth.

 

The bigger question in my mind is what happens to demand. It has been pretty unbelievable this year and is, in my opinion, the primary reason for the high pork and hog prices that have benefitted packers and producers this year.

 

Figure 1 shows monthly real per capita expenditures on pork for the past two years.  While comparisons to 2020 have frequently been difficult, we have been since August in a period when reasonable comparisons can be made – and they have been good, especially in September when pork RPCE was 9.4% higher than last year – and the second highest EVER...

 

more, including charts [3] 

https://www.nationalhogfarmer.com/news/lot-play-hog-sector