Coming off two strong years, margins in the pork industry are poised to contract some in 2023, as evidenced by the first quarter of the year.
The National Pork Producers Council's first quarter economic update says labor and input costs will weigh on industry margins even as production is expected to expand this year. USDA estimates that pork production declined by 2.5% in 2022, but will grow by 1.8% in 2023.
“It’s not a year that you would project to have profit margins as strong as ’22 or ’21,” says Kyle Hurley, vice president of agribusiness lending for GreenStone Farm Credit Services.
While market hog prices in 2022 were the best producers have seen since 2014, several factors cut into margins.
“On average, last year (2022) production costs were 21% higher than 2021, and 43% higher than 2020,” he says. “The primary driver is feed cost increases, but secondarily labor increases and utility increases also contribute. And, now this year we can add interest cost increases to that headwind as well.”
Last year labor costs were up 10%, while the number of laborers were down about 2%.
Profitability is variable based on how producers are managing these expenses, he says.
Since the first of the year, we've been in a declining price situation and declining more sharply over the past few weeks,” Hurley adds. “Some of that is due to the slaughter of hogs here in the first part of the year being higher than expected.”
Reduced Margins
Margin opportunities in 2023 compared to last year are not nearly as good, he says. In recent weeks, the summer futures market has sold off sharply. “But there is still potential for some positive earnings,” he says. “We would definitely need to see a rebound in futures, followed by a rebound in the cash market.”
As of March 1, there were 72.9 million hogs and pigs on U.S. farms, up slightly from March 2022 but down 2% from Dec. 1, 2022, according to the USDA’s Quarterly Hogs and Pigs Report, March 30.
According to Mary Kelpinski, chief executive officer of Michigan Pork Producers Association, Michigan raises nearly 2.5 million pigs annually and the 2022 annual cash receipts from the sale of hogs totaled over $500 million for producers in Michigan.
According to the United States Department of Agriculture, the annual pig crop in Wisconsin was 1.06 million head for 2022. That’s down slightly from the previous year.
Although projected U.S. pork production in the first quarter has been reduced, it is 1.4% higher than a year ago at seven7 billion pounds.
Prices of live equivalent 51-52% lean hogs are expected to average $56 per cwt in the first quarter, almost 15% lower than prices over the same period last year.
Demand Steady
Per capita consumption has remained at 51 pounds. Hurley says he expects it to stay pretty steady.
“With falling disposable incomes, there may be some be trades off protein. So maybe instead of steak, you buy pork chops, which would benefit pork demand,” he says. “The challenge is, of course, do you also lose the sale of pork chops to cheaper chicken breasts?”
The wildcard on the demand side will still be exports and those have been quite volatile, even though it's been good to start the year, according to Hurley.
Pork producers are exporting about 25% of the pork raised in the U.S. “That adds over $60 per head value to each hog that's marketed,” Kelpinski says. “Exports contribute to about 27,000 jobs in the state and $150 million of personal income. It's important our elected leaders remove non-tariff and tariff trade barriers so we can have a level playing field to export our product. We also want to continue to grow the number of countries we export into.”
For the first quarter of 2023, the export forecast of about 1.6 billion pounds is unchanged, according to USDA, as is the forecast for total exports for the year of about 6.4 billion pounds
On the supply side, one of the constant challenges is sow herd health, as producers strive to thwart off threats of Porcine Reproductive and Respiratory Syndrome (PRRS) and Porcine Epidemic Diarrhea Virus (PEDv).
Kelpinski says MPPA continue to fund the National Bank of vaccines. A vaccine for foot and mouth disease is now available, which Kelpinski urges producers to pursue.
“Disease pressures can cause significant production issues for the industry,” Hurley says. “We just don't yet know the severity of those issues yet this year.”
Keeping pigs healthy is one of the most important aspects of the pork industry, according to Kelpinski. “It’s what I spend so much time on. We're continuing to invest in the Beagle Brigade, making sure those dogs at the airports are specially trained and available to sniff out for illegal products coming into this country, especially pork products.”
The National Pork Producers Council's first quarter economic update says labor and input costs will weigh on industry margins even as production is expected to expand this year. USDA estimates that pork production declined by 2.5% in 2022, but will grow by 1.8% in 2023.
“It’s not a year that you would project to have profit margins as strong as ’22 or ’21,” says Kyle Hurley, vice president of agribusiness lending for GreenStone Farm Credit Services.
While market hog prices in 2022 were the best producers have seen since 2014, several factors cut into margins.
“On average, last year (2022) production costs were 21% higher than 2021, and 43% higher than 2020,” he says. “The primary driver is feed cost increases, but secondarily labor increases and utility increases also contribute. And, now this year we can add interest cost increases to that headwind as well.”
Last year labor costs were up 10%, while the number of laborers were down about 2%.
Profitability is variable based on how producers are managing these expenses, he says.
Since the first of the year, we've been in a declining price situation and declining more sharply over the past few weeks,” Hurley adds. “Some of that is due to the slaughter of hogs here in the first part of the year being higher than expected.”
Reduced Margins
Margin opportunities in 2023 compared to last year are not nearly as good, he says. In recent weeks, the summer futures market has sold off sharply. “But there is still potential for some positive earnings,” he says. “We would definitely need to see a rebound in futures, followed by a rebound in the cash market.”
As of March 1, there were 72.9 million hogs and pigs on U.S. farms, up slightly from March 2022 but down 2% from Dec. 1, 2022, according to the USDA’s Quarterly Hogs and Pigs Report, March 30.
According to Mary Kelpinski, chief executive officer of Michigan Pork Producers Association, Michigan raises nearly 2.5 million pigs annually and the 2022 annual cash receipts from the sale of hogs totaled over $500 million for producers in Michigan.
According to the United States Department of Agriculture, the annual pig crop in Wisconsin was 1.06 million head for 2022. That’s down slightly from the previous year.
Although projected U.S. pork production in the first quarter has been reduced, it is 1.4% higher than a year ago at seven7 billion pounds.
Prices of live equivalent 51-52% lean hogs are expected to average $56 per cwt in the first quarter, almost 15% lower than prices over the same period last year.
Demand Steady
Per capita consumption has remained at 51 pounds. Hurley says he expects it to stay pretty steady.
“With falling disposable incomes, there may be some be trades off protein. So maybe instead of steak, you buy pork chops, which would benefit pork demand,” he says. “The challenge is, of course, do you also lose the sale of pork chops to cheaper chicken breasts?”
The wildcard on the demand side will still be exports and those have been quite volatile, even though it's been good to start the year, according to Hurley.
Pork producers are exporting about 25% of the pork raised in the U.S. “That adds over $60 per head value to each hog that's marketed,” Kelpinski says. “Exports contribute to about 27,000 jobs in the state and $150 million of personal income. It's important our elected leaders remove non-tariff and tariff trade barriers so we can have a level playing field to export our product. We also want to continue to grow the number of countries we export into.”
For the first quarter of 2023, the export forecast of about 1.6 billion pounds is unchanged, according to USDA, as is the forecast for total exports for the year of about 6.4 billion pounds
On the supply side, one of the constant challenges is sow herd health, as producers strive to thwart off threats of Porcine Reproductive and Respiratory Syndrome (PRRS) and Porcine Epidemic Diarrhea Virus (PEDv).
Kelpinski says MPPA continue to fund the National Bank of vaccines. A vaccine for foot and mouth disease is now available, which Kelpinski urges producers to pursue.
“Disease pressures can cause significant production issues for the industry,” Hurley says. “We just don't yet know the severity of those issues yet this year.”
Keeping pigs healthy is one of the most important aspects of the pork industry, according to Kelpinski. “It’s what I spend so much time on. We're continuing to invest in the Beagle Brigade, making sure those dogs at the airports are specially trained and available to sniff out for illegal products coming into this country, especially pork products.”
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