Pork: World Markets and Trade

Global production is forecast up nearly 2 percent in 2018 to 113.1 million tons, primarily on expansion in China and to a lesser extent the United States. China’s pork production will rise for the second consecutive year as producers respond to positive returns. Additions to the sow herd and higher finished weights will both drive production during 2018. Robust consumer demand for pork will also boost output in Russia, the Philippines, and Mexico. Among major producers, only the European Union will reduce output due to a stagnant domestic market and export sales.

Global exports are forecast nearly 3 percent higher in 2018 driven by strong demand from Mexico, the Philippines, and South America (Argentina, Chile, and Colombia) where competitive prices support gains in per capita consumption. China will remain the top importer, but shipments will fall for the second consecutive year due to rising domestic production. The European Union will remain the largest exporter – unchanged at 2.8 million tons – but export growth is challenged by declining shipments to China and an appreciating euro. U.S. production and exports: Production is expected to grow 4 percent in 2018, continuing strong growth in 2017. Producers have responded to robust domestic and export demand by farrowing more sows while the number of pigs per litter is at record levels.

Continued production growth is expected to pressure hog prices in 2018 and help spur a near 5- percent gain in exports. Mexico will remain an important market for the United States, aided by relatively high domestic prices. Shipments will also remain resilient to Asia, especially to Japan and the Philippines.

China’s Swine Herd Enters a New Cycle

Lindsay Kuberka, Agricultural Economist Buoyed by strong returns over the past few years, Chinese hog producers entered an expansionary period during 2017 which is forecast to continue during 2018. The industry continues to undergo significant consolidation, hastened by new and stepped-up enforcement of environmental regulations aimed at curbing pollution from swine farms. Producers are fewer in number but larger, as producers respond to growing production costs with increased scale efficiencies. Expansion is expected to drive pork production up during 2017 and 2018 after 2 consecutive years of declining output. China’s pork imports are forecast to decline considerably over the same period, but remain far above historical levels.

Environmental Regulations Hasten Industry Consolidation

Chinese hog producers continue to adjust to a stricter regulatory climate at the same time that the herd emerges from a cyclical low. New standards limiting manure emissions from livestock farms have resulted in the closure of swine farms in proximity to vulnerable water supplies and urban centers. Remaining farms have been required to invest in costly manure management facilities and equipment that small-scale farms cannot easily bear. Closures have proceeded at a pace that varies across regions with a target for completion at the end of 2017. While many provinces have completed closures, implementation is still underway in other provinces, including some with dense swine production. According to the Ministry of Environmental Protection, 213,000 farms were closed or moved during the first half of 2017. However, lack of precise data on the pace and full scale of closures continues to cause considerable uncertainty over the number of farms and hogs remaining.

Several meat and feed companies have announced ambitious expansion plans to fill the void left by the exit of small-scale farms. Numerous operations have been built with modern facilities and capacity to hold thousands of sows each. Agricultural authorities offer subsidies to help farms upgrade handling and treatment of manure, and for demonstration programs to utilize manure as organic fertilizer. Participants in these programs are predominantly medium- or large-scale farms.

Farm closures come at the end of a cyclical contraction in hog supplies and a steep run-up in prices that began in 2014. Between 2013 and 2017, China’s total swine herd declined 9 percent to 435 million head. The sow herd fell faster, declining 13 percent during the same period. The outsized change in sows reflects the exit of mainly small, less-efficient producers who could not comply with new standards. The herd is forecast to recover modestly by the end of 2018 while sows are expected to be added by the beginning of 2018.

Hog Prices Expected to Decline Through 2018

Historically high prices and the entry of modern farms led to a rebound in capacity that is partially offsetting the impact of farm closures. Pork production is forecast to grow 1 percent in 2017 and 2 percent in 2018. Pork production growth is supported by efficiency gains on farm. Production per sow per year (PSY) 1 rose from an average 14.2 in 2013 to 14.9 in 2016, with the most efficient producers reporting PSYs of over 25, closing in on rates in the United States. Advancements in productivity can be attributed to improvements in genetics, animal health, and veterinary care.

Besides expanding barn space, producers are also investing in technology like automatic feeding and monitoring systems which boost animal health and lower costs. These factors are expected to support growth in average carcass weights next year.

Record hog prices and large profits during 2016 encouraged producers to invest in new facilities and equipment. Producers reaped profits of $100 per head last year and most producers will at least break even during 2017, despite a substantial decline in finished hog prices. Large and vertically integrated companies are expanding at extraordinary rates, mostly through the adoption of contract farming arrangements (termed “company plus farmer”). Integrators build farrowing facilities, but outsource grow-out to small farmers who own land and feeding barns. These farmers are provided animals and all inputs and guaranteed a minimum price for finished hogs. While the largest producers still control a minority of hog supplies, growth in this part of the sector now appears to exceed the exit of small producers, a trend which will drive hog supplies during 2017 and 2018.

Production Growth Dampens Demand for Imports

Imports are forecast to decline for the second consecutive year in 2018 as production gains reduce demand for imported pork. Although pork production is expected to recover in 2018, demand strength will support increased imports. However, imports are expected to fall short of the peak reached in 2014. With production growing in most major exporting countries, declines in international pork prices will keep imports relatively competitive. The European Union, United States, and Canada will remain the principal suppliers, competing primarily on price. With relatively strong demand for processing, imports are unlikely to retreat to past levels, maintaining China as the top importer of pork.

Source: United States Department of Agriculture, Foreign Agricultural Service, October 12, 2017