U.S. Pork Prices Hit Multi-Year Low

Spend Matters welcomes this guest post from George Duke, market analyst at Mintec.

Pork prices in the U.S. have fallen sharply since June, with August prices 40% lower month-over-month. Seasonal falls in pork prices can be expected for the late summer. This year, however, pork prices are falling at a more significant rate than the historical average.

Usually, U.S. pork prices reach their lowest point between October and December. This is due to the consumption slump after the grilling season of the summer. Furthermore, pork production tends to peak when hog slaughter is at its highest in the fourth quarter of the year. Current prices are at a multi-year low and, if seasonal trends continue, prices could be driven even lower by October. So why are prices falling faster than expected?

First, pork production is currently higher than last year. U.S. inventories of hogs are 3% higher year-over-year, with low feed costs stimulating production. Additionally, the introduction of three new packing plants in Minnesota, Iowa and Michigan in late 2017 meant herds grew to meet the new packing capacity. A record number of piglets were bred as a result of the 7 million annual head packing capacity that the three new packing plants provided.

Along with increasing pork volumes in the U.S. market, rising supplies of beef and poultry mean that there are vaster meat supplies to compete for consumer spending with, eventually weighing down on pork prices. U.S. beef production is projected to increase by 4% year-over-year in 2018 and volumes in the U.S. poultry sector are expected to rise 3% year-over-year.

But perhaps most significant, retaliatory tariffs from China and Mexico on U.S. pork are driving down prices. As 22% of all pork produced in the U.S. finds its way overseas, the export market is a substantial destination for U.S. pork. In particular, China is a top consumer of U.S. pork, making up 10% of U.S. pork exports by value, at an estimated $700 million. In July, China implemented a second round of retaliatory tariffs, adding an additional 25% duty on imported U.S. pork, taking the total tax to 70%. The impact of China’s first round of tariffs can already be seen, with pork shipments from the U.S. to China between May and June falling 40% year-over-year. Furthermore, Mexico’s 20% tariff on U.S. pork legs and shoulders has hampered U.S. export growth further.

As one of the largest consumers of pork, China is diversifying its pork sources to compensate for diminishing U.S. imports. In search of alternative trade routes, Chinese importers have looked to the E.U. and South America.

Nevertheless, China may continue to rely on U.S. pork imports, as outbreaks of the highly contagious African swine fever (ASF) have been detected in China recently, hampering domestic production. This has led to the culling of over 25,000 pigs. It is still too early to determine the impact on domestic pork production in China, or on their need to import pork. However, a possibility could be that there is no choice but to continue importing U.S. pork at inflated rates, as alternative trade routes may not have the supplies necessary to fulfil China’s pork consumption.

In the face of falling pork prices, there is some respite for U.S. producers. Successful NAFTA negotiations with Mexico have created some positivity in the pork industry, with hog future contracts rising 3% in response to the news. Moreover, the U.S. Department of Agriculture announced details of a relief package for pig farmers in late August. The relief package grants pig farmers $8 per hog based on 50% of their herds as of Aug. 1, 2018. This capital injection into the pig industry, along with a cooling of trade tensions with Mexico, may perhaps slow the decline of U.S. pork prices as we approach the early winter.