Pork Profit Balloon Deflates; It’s Time to Reevaluate Liquidity

03:53PM Aug 07, 2019
Deflated Balloon
( Pixabay )

By Dennis DiPietre and Lance Mulberry

The “giant sucking sound” (with apologies to the late Ross Perot) you might have heard or even felt was the air coming out of the pork profit balloon—not only now, but all the way out 12 months or more in the future. An Iowa firm that monitors future hog margins using current and expected futures costs and prices indicated that the average expected net income for producers fell a record single week amount of close to $25.00/head in the last week of July. This is an average drop for the entire coming 12 months. 

While profits are still expected in every future month over the same horizon, they will, by this current market’s judgement, be substantially less. The decline was softened some by marginally favorable declines in futures markets prices for corn and soybeans. None of this is realized yet, so all of it could— and will—change some. But it’s a sign of the volatile nature of global markets right now.    

We’re in a very interesting, if not treacherous, time in the evolution of world pork production, global markets and technological developments, such as artificial intelligence. The current global political situation is rife with struggle, and the Trump administration is challenging customary terms of commerce in an attempt to reset the footing the relationships have rested on. 

Of course, there’s resistance to change at every level of the changing trade tradition. But when major trading partners like China are involved, the offer and counteroffer can become attack and counterattack, as each party has a lot at stake.

China has the tools and the knowhow to press its side of the argument with high precision. As you may know, China uses artificial intelligence methods to micro-target counter-tariffs on the U.S. at the county level—and sometimes at geographic levels beyond counties. Geographies and product combinations as well as other key attributes are carefully chosen to cause producer frustration at a level that makes the political cost to the current administration too high to continue.  

Most recently, as the talks broke down the U.S. applied more pressure, and now we’re seeing counterattacks step up as each side attempts to strengthen its hand when new talks resume.

There is no doubt that China needs pork, and they are getting it through a carefully orchestrated global acquisition scheme involving many sources and middlemen handlers. The U.S. is now set up as a major exporting country producing pork in great excess of domestic consumption totals. There is a perfectly beautiful economic win-win possible here, but other very important issues reaching well outside of agriculture add complications to the simple logical resolutions possible. 

Major expansion over the last three or four years quickly pushed out another 3% to 4% increase in U.S. production capacity onto the markets. So far, the U.S. meat channel is doing a remarkable job of moving all of that, while returning reasonable profits to producers and other chain entities. 

That can swing fast in either direction now, and no one can accurately predict which way it will wind up.  So we are seeing huge short-term reassessments of future prospects as reflected in the futures market prices of both hogs and the key feed ingredients such as corn and soybeans.

There is no question that in times of higher volatility, the production sector must hold more liquidity, which means a skid on expansion. And in most cases, this means a halt to all but critical new investment of any kind—whether modernization or long-term maintenance items that can be safely postponed. That will contribute to a slower rural economy, but recent years of breakeven or less on the crops side already got that started. A critical first step: Halting expansion and reducing debt while reevaluating liquidity necessary for a deep and sustained challenge to profitability. 

More Pork Signals in Farm Journal's PORK:

Is China’s Economic Slowdown a Signal of What’s Ahead?

Pork Signals: Push Back Against the Blahs

Don’t Be Caught Unprepared: Data Collection Not Optional

Dennis DiPietre and Lance Mulberry are economists with KnowledgeVentures, LLC. They consult with producers, processors, pharmaceutical companies, genetics firms, nutrition experts and technology providers, throughout the global pork chain. The focus of their consultation is driving client innovation and optimization in precision agricultural processes through bio-economic modeling. For more information, email [email protected]