FOCUS ON AG
July 3, 2023
PORK INDUSTRY FACES CHALLENGES
Over the years, the swine industry has long been a source of farm income stability for many farmers and in many rural communities; however, in the past twelve months poor profitability in hog production has pushed many pork producers to the brink of financial disaster. The swine industry was hit hard by the U.S. trade war with China in 2018 and 2019 and then by the Covid pandemic in 2020 that resulted in reductions in pork processing capacity. Now pork producers are being challenged by too much production and reduced domestic demand for pork, along higher costs for feed, labor, interest, and other expenses.
A comprehensive 2021 swine industry study titled “The United States Pork Industry 2021 Report”, involving USDA and several Universities, analyzed the economic impact of the pork industry on the U.S. economy, as well as looking at the economic impact for individual States. According to the Study, there were more than 66,000 pork producers in the U.S. in 2021 that marketed over 140 million hogs valued at over $28 billion in gross receipts. The value-added from the hog marketings resulted in a total of $35 billion in personal income and added $57 billion to the GDP in the U.S. The study estimated 610,000 jobs in the U.S. can be linked to the overall impacts of the pork industry. The entire 2021 U.S. Pork Industry Report can be found on the National Pork Producers Council website at: https://nppc.org/the–pork–industry/
The 2021 study data showed that nearly 34,000 jobs in Minnesota were linked to the pork industry and that there was a direct economic impact of over $1.95 billion, as well as another nearly $3.36 billion of value-added impact, that was generated from the State’s swine industry. In 2021, Minnesota had 3,225 hog farms that marketed over 16 million hogs that generated nearly $3.3 billion in gross receipts. Iowa had 5,660 hog farms that marketed over 46 million hogs, generating approximately $9.4 billion in gross receipts in 2021. The Iowa pork industry supports over 88,000 jobs in the State, while adding $4.6 billion in personal income and nearly $8.5 billion in value-added benefits to the Iowa economy.
Many hog producers have been losing $20 to $40 per head on every pig marketed during first half of 2023. Obviously, some farmers can only withstand those types of losses for a given time before they need to make some decisions regarding their future in hog production. In recent months, the liquidation of mother sows has increased significantly due to the low profit margins. In the short-term that has sent even more hogs to market and added to the already over-supply of pork in the U.S., putting even more downward pressure on already depressed market hog prices. In the bigger picture, the reduced sow numbers should help reduce the total U.S. hog inventory and pork supply later this year and into 2024, which should help strengthen market prices.
The current economic challenges in pork production are the result of a lot of factors that have come together at the same time. The biggest challenge to U.S. pork industry has been an excess supply of pork and lower domestic demand in 2023, compared to 2021 and 2022. Fortunately, pork export levels have remained strong, and it is hoped that U.S. pork demand will rebound as we head through the Summer months. At the retail level, fresh pork is still an economical choice for consumers compared to other meat and protein food choices.
At the farm level, the negative profit margins have been driven by low market hog prices, high input costs for feed, supplies, and labor, rapidly rising interest rates, and swine disease challenges. Some long-time pork producers have compared the current stretch of negative profit margins to the financial hardships faced by the pork industry in 1998 and 1999, when market hog prices dropped to as low as 8 cents a pound. Many small-tomedium size swine producers exited the business during that period. As mentioned earlier, there has been considerable liquidation of sows in recent months, and if the negative profit margins continue, we may see more hog producers exiting the business for good later this year.
Proposition 12 creates a new challenge for the Pork Industry
What is “Proposition 12”? The “Farm Animal Confinement Initiative” or so-called “Proposition 12” law was passed by the voters of California in November of 2018. The new law mandates that all whole pork sold in the State of California must come from market hogs that were born from sows that had housing with at least 24 square feet of floor space with the ability to turn around, meaning that it would ban the use of sow gestation crates in hog facilities. The Proposition 12 law applies to all uncooked pork that is sold is sold in California, whether it was raised in California or raised in any other portion of the U.S. or other countries.
The implementation of Proposition 12 had been delayed by various court cases since it was passed in 2018, mainly challenging the legality of one State in the U.S. dictating how food is raised and processed in the entire country. However, in mid-May of 2023 the Supreme Court of the United States upheld Proposition 12 by a 5-4 decision, which will allow the law to be implemented on July 1, 2023. Massachusetts passed a similar law a few years ago that sets sow housing standards for pork production, which could also now be implemented following the Supreme Court decision. Many analysts in the livestock industry wonder if the Supreme Court decision may encourage other States to set individual standards for how livestock is raised and how food is produced.
On the surface Proposition 12 standards may not appear to be a major issue; however, these new requirements could create some immense challenges for the pork industry. California accounts for somewhere between 10-15 percent of the total pork consumption in the U.S, based on various estimates; however, the State produces far less than one percent of the pork that is consumed within its borders. This means that most of the fresh pork being sold in California is likely being raised and processed in Iowa, Southern Minnesota, and other Midwest locations. After July 1, Midwest pork producers that raise hogs to be processed for pork sales into California need to meet the new Proposition 12 standards. Swine industry experts estimate that less than 5 percent of the existing Midwest sow facilities can currently meet those standards.
Most commercial sow gestation units in the Midwest currently have 18-20 feet of floor space per sow and utilize gestation crates that allow for individual customized feeding, breeding and care of the sows. Increasing the requirement to the new California standard of 24 square feet increases the space requirement per sow by 25-35 percent. This means that a producer can house 25-30 percent less sows in the same area of building space and produce 25-30 percent fewer hogs each year, compared to traditional sow housing systems. In addition, converting existing sow housing facilities to the new required standards may be quite expensive and there will likely be added labor expense to handle the sows in the converted sow housing style. Producers have no guarantee that there will be any added value at the farm-level for the market hogs that are being sold for pork sales in California.
Pork processors and wholesale food outlets will also face challenges with the new Proposition 12 requirements. Fresh pork that is being processed and delivered to California for retail and restaurant food sales will now have to be separated from the pork products going to other States, which will add cost and could create some supply chain issues in California. Most meat industry experts expect retail pork prices in California to increase due to new pork industry requirements. It is not yet clear how California officials plan to enforce the new requirements within California or in other States; however, there are potential criminal and civil penalties built into the law for non-compliance with the Proposition 12 standards.
The swine industry has gone through many economic cycles in the past and has always bounced back from economic downturns in raising hogs and producing pork, which is likely to occur again following the current economic challenges. Some industry experts project that because of the reduced sow numbers and lower hog production in 2023, together with potentially lower feed costs, producers should see the profit margins from pork production improve by late 2023 and into 2024. The level of profit improvement will likely depend on increased consumer demand for pork products and continued strong pork export levels, as well as whether a pending U.S. drought raises grain prices and drives up feed costs again later in 2023. The implementation of Proposition 12 certainly adds a “wild card” into the mix as far as future pork profit levels; however, the full impacts of the new law will likely not be known for some time.
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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President,
MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960)
E-mail — kent.thiesse@minnstarbank.com) Web Site — http://www.minnstarbank.com/