The Ukraine-Russian War: Rampant Inflation Puts Serious Squeeze on Disposable Income
Although the U.S. may not be feeling the immediate impact of the Ukraine-Russia War yet, it’s coming, says Rupert Claxton, livestock and meat director at Gira.
Much higher energy costs and higher feed costs as a result of the war between Ukraine and Russia are putting even more pressure on rising commodity prices. Ukraine grain and oilseed exports under any scenario are going to be minimized in 2022, but fertilizer could be the limiting factor, Claxton said during a Pork Checkoff webinar.
“There’s a huge impact on fertilizer cost because gas is really important in the production of fertilizer,” Claxton says. “Going forward, we’ve got to think about this sort of compounding effect of various costs going up. We’re seeing this across the whole system – fertilizer, feed, energy, transportation – nearly everything is bearing this oil price at the moment.”
He says farmers are going to be more sensitive about when and how they put fertilizer on. At $900 to $1,000 a ton rather than $200 to $250 a ton, will they just put it on speculatively? Probably not, Claxton says. They are more likely to “keep it in the barn” for another day.
This isn’t just happening in the U.S., he adds, it’s happening all over the globe. The result will be poorer yields and less grain on the global market.
“Now, farmers, if they're clever, will be able to maximize what they do with their fertilizer. But that still means at the end of the day, there'll be less grain in the world market and therefore higher prices,” Claxton says. “And you can take 55 million tons of grain out of the world market that's missing from the Ukraine in the next 12 months at least – their export volume on the world market.”
So, what does this mean for U.S. pork producers?
Feed Prices
“U.S. pork producers buy a lot of feed forward. They’re much better at hedging, both in and out and further ahead, than Europeans,” Claxton says. “The U.S. is not seeing that feeding crop increase today, but we can see it out there.”
No one is denying that these increases in feed cost will be passed on to the meat and livestock producers, he adds.
“We've got a whole load of other cost increases that we are paying for, whether that's fuel on the farm, transportation, labor,” Claxton says. “The fact that hog prices are where they are today means you can actually bear some of that price increase, and still make a profit on it.”
Recover More Value
The U.S. market has been staggering in recent years, he says, as it continues to see year-on-year growth in meat consumption. There’s no question chicken is a big part of that, but he says it’s happening across all species and continues at pretty good values.
“We’ve been pretty good in the U.S. at passing some of that cost on and recovering more value out of the carcass. So that's been a really good story,” he says.
However, looking ahead into the next 18 months, he says producers may need to swing their thinking back to 2011-12, when they last saw those big price increases.
“Back then, the European industry wasn’t very good at recovering byproducts out of the carcasses. They were making enough money on the carcass, although it was a bit tight. Suddenly they got a lot better understanding the value of various parts of the carcass and trying to recover money from what they were doing because cost of production had gone up markedly and they struggled to pass that through to the consumer.”
Claxton questions how much more the U.S. pork industry can really recover out of the carcass to add value without passing all of the cost increase on to the consumer.
Consumption Decline
The reality is that the consumer is already feeling the squeeze, Claxton says. High gas prices, increased energy costs and inflation in goods across the spectrum are causing consumers to think twice.
“It all eventually comes back to their disposable income, how much they have left over that they can use to go out and spend on nice things,” he says. “At the end of the day, meat is a luxury product. It’s not a given that people will go and buy, especially the higher end bits of meat.”
Middle-income families may not be saying no to meat purchases yet, but he says low-income workers are definitely having to take a step back to consider whether or not they can afford to buy as much meat as they typically would. Claxton says this group of consumers is critical when it comes to absorbing a certain amount of meat out of the market.
“There's a whole basket of issues that are a problem. That’s the thing that the pork producer needs to keep an eye on – the pinch,” Claxton says. “It's hard to pass those costs on in a market where the consumer at the other end is feeling squeezed.”
An Eye on Exports
Because of these challenges, it’s more critical than ever to get product moved through exports.
“We know some of your markets in Mexico aren't going to perform as well, because they’re seeing consumers squeezed. And you go out into global export market, demand is generally there, but China is still not back in the market buying in significant volume,” he says.
The impact of Omicron in China is disturbing everything from ports and internal infrastructure to transportation and supply to big cities.
“Consumers aren't going out and buying meat in the way that they would be going out in a normal situation. Some of them aren't going to work, they haven't got income coming in, others just can't get to the market. In other places, you can't get the meat to the consumer for it to be consumed,” he says.
Meanwhile, Europe has more pork than it can consume.
“Up until a month ago, Europe was very aggressive on price and had a weak Euro. So, it was exporting very competitively against the U.S. into a number of markets. The Canadian price, if you stack it up against the U.S. price, is very low at the moment as well,” he says. “There are things out there that say, the U.S. pork industry is slightly out of tune with the rest of the world. The tightness of supply is a good thing because right now the last thing you want is an oversupply, where those prices come down.”
That tightness of supply has everyone scratching their heads about what came out in USDA's Hogs and Pigs report yesterday, he adds.
“That is the thing that’s making the industry profitable today. Don't go and ramp up production to the point where those pigs don't have value and you're struggling to pay to feed them,” Claxton says.
Don’t Lose Sight of Sustainability Goals
Time and resources will be distracted from the key global challenge of climate change, Claxton says.
“You've got to continue to do the work you're doing on the long-term projects – sustainability criteria, marketing of the quality of your meats,” he says. “Everyone else is still working on them. If you stop now, you fall behind that curve. So for me, the thing to really emphasize is not to take your eye off that long-term goal.”
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