Kevin Grier is a respected and connected agriculture and food market analyst with a solid understanding of industry issues from farm to retail. His research and analysis helps companies, producer groups, financial service organizations and governments make informed decisions that impact their bottom line. Website: www.kevingrier.com

One of the characteristics of the pork market during the first half of this year was the relative stability in pricing and supply. This was a relief, if not very unusual after the wild rides of 2014 and 2015. Recall that in 2014 no one really knew the real supply impact of the PED outbreak in the U.S. For the most part, the industry seemed to be always on the short side of demand and of expectations. That meant that the industry was usually short of hogs and pork and pricing reacted by exploding to record highs.

Moving into 2015, it was the opposite. The producer recovery in the United States exceeded expectations. That often meant that production also exceeded expectations and pricing responded accordingly.

The year to date

By the later quarter of 2015 and through the first half of 2016, the stability of pricing and the predictability of supply was a welcome respite. By June and July this year, however, pricing began to soar higher. Buyers and sellers alike were either blaming or crediting the surging buying and demand from China. Hog prices, futures and pork cuts generally bounded higher.

By mid-July, however, the bloom was off the Chinese demand. A more sluggish export demand profile was combined with domestic demand that no longer was supported by record high beef prices. In fact by this summer, beef prices, while not low, were starting to look half-reasonable to both consumers and grocers alike.

To make matters worse for pork sellers, slaughter levels were exceeding what was expected based on the USDA June Hogs and Pigs Report. Combine a weaker demand with more slaughter and production and it is a recipe for big price declines, which is exactly what happened in late July and August.

Instability continues in the fourth quarter

All of that is a long way of saying that the stability that market participants were enjoying for the previous nine or so months appears to be in the rear-view mirror. Looking to the fourth quarter there is a greater chance of instability than stability. That is mostly because of the supply side. It was always known and loudly shouted that there were going to be weeks in the fourth quarter where supplies of live hogs would be bumping up against U.S. slaughter capacity. I noted repeatedly that as long as the demand for pork was there and as long as margins held, U.S. packers would wade through the numbers like a hot knife through butter.

The question, however, is that given that numbers seem to be coming in more than expected, is the capacity situation going to be more precarious? That appears likely. Again the industry is going to be counting on strong demand on both the domestic and export fronts in order to pull through the October to December period.

The effect of U.S. slaughter capacity

Speaking of capacity, there has been a great deal of interest, if not outright excitement on the pending slaughter capacity coming on stream in the United States. As a starting point, there are likely to be two new, albeit smaller plants being completed by this fourth quarter. The two plants are located in Missouri and Minnesota and will have a combined weekly capacity of 30-35,000 head.

There are also two larger plants that are going to be operational in the third or fourth quarter of 2017. Those plants in Iowa and Michigan will be operated by Seaboard Triumph Foods and the Clemens Food Group respectively. Both plants will initially have just one shift but will be killing about 50-60,000 head per week each. It is likely that the Triumph plant would be double shifted by 2018 and it is possible that the Clemens plant will also be double shifted by then.

Furthermore, with regard to 2018, Prestage Farms plans to build a big 50,000/week single shift plant in Iowa which should be operational by the fourth quarter. Both Seaboard and Clemens are long established packers with deep production roots. Prestage on the other hand is a large scale producer that is just entering the packing sector.

Good news for retail pork buyers

We could talk a great deal about what this all means for the pork industry but one thing is clear, pork buyers at retail and foodservice are likely going to be in the driver’s seat. Another thing that is clear is that it is going to be tough sailing for the packing sector starting in 2018 or sooner. All that new capacity is going to be chasing both hogs and customers. Pork buyers will be wooed by packers who will be seeking to keep customers and others looking to find new customers.

The bottom line for the industry is that there is going to be record volumes of pork coming in the next couple of years. The period of calm of the last several months is going to give way to more volatility. All of the industry, from producer through to retail/foodservice is going to need the robust demand that the industry has enjoyed recently to continue to hold strong.