US pork producer margins to remain tight – report

Despite rising hog prices, margins for pork producers will remain close to break-even levels in 2016 thanks to rising feed costs, according to a report from the University of Illinois at Urbana-Champaign Department of Agricultural Economics.

A shortage of pork in China has pushed up demand, nudging prices up by about $2 per hundred pounds above the $50 average seen last year. The shortage is a lagging effect from Chinese herd reductions in 2014 in response to low margins, according to the report.

The increased demand is expected to drive US pork exports up by 5 percent or more in 2016 over the previous year, as China is expected to challenge Japan as the world’s largest pork importer.

But the boost in prices comes alongside projected rising feed costs, as South American corn and soybean production has been lower than expected. High protein meal at Decatur Illinois has increased to more than $400 per ton, compared with just $276 on average in 2015, the report notes. Poor weather could also negatively impact US crops, further reducing global supply.

As a result, losses for US hog producers are projected at $2 per head, compared to $3 per-head losses in 2015, meaning producers will fall just short of covering all costs, including depreciation, labour and equity return.

The volatility in feed prices makes it unlikely that farmers will increase production in response to rising demand.

“Producers well remember the extreme feed prices experienced in 2008 and again in 2011, 2012, and 2013. That unpleasant memory should help keep expansion plans on hold for now,” the report concludes.