Opportunity Knocks: Pork Margin Outlook

Following nearly two years of below breakeven margins, the outlook for pork producers has improved in recent months. While the change in tide has felt long overdue for an industry that has been through the wringer, it is important not to lose sight of the opportunity to protect favorable margin levels available over the next five quarters. It may be prudent to examine layering into protection against adverse outcomes when we know the existing conditions can, and often do, change quickly. As we head into planting season across the Corn Belt and look to the start of grilling season, it is worth examining the fundamentals at play and where margins rank from a historical perspective.

The natural place to start is looking at supplies. Hog weights have fallen after a bump coming out of the Easter holiday and are near the historic average for this point in the year. Coupled with slaughter posting only marginal gains from a year ago, pork production for the week ending April 27 was down 0.3 percent year-over-year. Year-to-date, pork production is 0.2 percent higher. Production being kept in check has been supportive of cash and the futures curve through the first four months of the year.

Figure 1. Weekly Pork Production

Data Source: USDA AMS

Earlier this month, USDA released its latest WASDE report, which provides insight into expectations for quarterly pork production. While annual production is pegged 2.9 percent higher in 2024 compared to last year, it is worth noting the variability across quarters. For example, production in Q3 and Q4 is pegged 5.3 percent and 4.6 percent higher, respectively, than the same quarters in 2023. Beef and broiler production projections for 2024 were also increased from the previous month’s estimate. If realized, this indicates the availability of proteins could be increasing and put pressure on wholesale and retail meat prices.

Figure 2. Quarterly and Annual Pork Production

Data Source: USDA WASDE

Domestic demand has always been tougher to pinpoint but by most measures, it has improved significantly from a year ago. With beef prices continuing to be at or near record levels as they experience a continued contraction in market ready cattle supplies, pork’s competitive standing remains strong. This could be particularly helpful as we head into the summer months and consumers look to fill their grocery basket for cookouts and other holiday gatherings. Retailers have been active throughout the first four months of the year featuring pork products, providing a tailwind on the demand front. In recent weeks, chicken featuring rates have increased. While this does not spell the end of strong pork demand from the U.S. consumer, it does represent a potential risk from a competing protein clawing back market share ahead of summer.

Figure 3. Domestic Pork Disappearance

Data Source: USDA

Much has also been made of the stellar start to the year for pork exports, and for good reason. Mexico and South Korea have been leading the charge through the beginning of 2024. Pork exports are 11.4 percent higher year-to-date. While weekly export sales data is notoriously noisy, outstanding sales have dipped in recent weeks and remain behind year ago levels and the 5-year average for this point in the year. Time will tell whether this is a blip or the start of a new trend.

Figure 4. Year-to-Date Pork Exports

Data Source: USDA ERS

A rundown of pork market fundamentals is not complete without touching on international competition. There were several key changes in this month’s Livestock and Poultry: World Markets and Trade report. USDA lowered Chinese pork imports from the January estimate by 17 percent. Year-to-date, Chinese pork imports are 52 percent lower. USDA also updated their latest EU pork production and export projections from January. Whereas the January projection called for a contraction in EU production and exports, the April update is currently calling for a year-over-year increase for both measures. While the production increase is not enough to outweigh the expected decrease in Chinese production, it is worth noting the export market is projected to become more crowded in coming months than initially expected.

Figure 5. Year-over-Year Pork Production and Export Changes

Data Source: USDA FAS

There are many different conclusions one could make from the fundamental drivers outlined above. On the one hand, demand has been great, both domestically and international, and supplies have been manageable. It is natural to focus on the bullish fundamentals and they are compelling. On the other hand, production is projected to pick up steam as we head into the fall and increased competition is forecasted on the international stage from the EU, Brazil, and others. While not highlighted above, risk is also ever present in the feed sectors as we bank on Mother Nature providing the correct environment to achieve favorable yields for corn and soybeans. Will feed costs remain in check? Everyone can form their own bias about where profit margins may head in the coming months based on the aforementioned variables. Furthermore, they can determine if and how they may wish to protect favorable profit levels based on these factors.

One method we lean on with clients to remove some of the emotion inherent in risk management and objectively assess what the market is offering is by looking at historical percentiles. Every producer’s costs of production (feed and non-feed costs) and pricing mechanisms for their hogs are different. Also, risk tolerance will vary from farmer to farmer based on their own operation’s goals and cash flow considerations. That said, the graph below displays margins for a demonstration hog operation for Q3 2024.

Figure 6. Q3 2024 Demonstration Operation Margins

As of the writing of this article, Q3 margins ranked at the 94th percentile of profitability over the past decade. In other words, 94 percent of the time in the last 10 years Q3 open market margins have been below a value of $18.42 per hundredweight for this farm. Margins through Q2 2025 are at or above the 85th percentile over the past decade. From a rolling 12-month margin perspective, margins are very strong and at the 91st percentile of historical profitability even after a slight setback last week.

Figure 7. 12-Month Rolling Demonstration Operation Margins

From a risk/reward standpoint, there has historically been more risk to the downside from here than there has been opportunity for margins to the upside. To be clear, this is not to say we cannot or will not set new highs, but historically speaking this has been a rare opportunity to protect. Margins could turn to lower levels based on one of three scenarios:

1. Feed costs increase more than hog prices
2. Hog prices fall more than feed prices
3. A combination of lower hogs and higher feed prices

For these reasons, it is important to think about managing all three legs (lean hogs, corn, and meal) in conjunction to protect favorable margin opportunities. How a producer chooses to go about protecting these levels will vary based on risk tolerance and individual biases. They may select from fixed price tools (cash contracts or futures) to tools that are more flexible in nature (options or LRP) to provide protection against lower margins but retain opportunity for margin improvement. Oftentimes, producers will choose a mix of the two to align their protection with their operation’s goals. For more help on evaluating specific strategy alternatives or to review your farm’s risk profile, please feel free to contact us.

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