As we head into the heart of autumn, leaves are not the only things changing. Profitability prospects for pork producers around the country have shifted dramatically in the past several weeks and offer historically rare profit opportunities to protect. The fall in feed prices has dramatically changed projected costs of production for many operations. While that is not to say things cannot continue to move in favor of the pig farmer, we have learned that margin opportunities often change in a hurry. Let’s examine the factors that have contributed to this recent change in outlook and see where profit margins rank looking out over the next 12 months.

Hog Supply

Pork production is always the easiest place to start the discussion because of the abundance of data USDA provides on a daily and weekly basis. Although production is higher than a year ago, it has been within the realm of expectations and has yet to become burdensome. Hog slaughter is 1.2% higher year-to-date (YTD) and production is up 1.6% YTD. Both figures are largely in line with expectations coming out of the June Hogs and Pigs report. Supplies over the last two weeks have been tighter year-over-year, providing support to nearby futures.

Figure 1. Weekly Pork Production

Last week’s Hogs and Pigs report indicated overall inventory levels and production expectations were largely in line with analysts’ pre-report expectations. The main surprise came from the “120-179 pounds” and “180 pounds and over” weight brackets. Both weight groups were higher than a year ago (+3% and +5%, respectively). If realized, hog slaughter must run at much higher levels in the next 6 to 8 weeks than we have witnessed over the past several weeks. USDA projects 2025 annual pork production to increase another 1.6%. While this expectation can and will change over time, hog prices and the futures curve are holding up well despite the expected continual increase in production.

Hog Demand

Demand for hogs and pork has been robust through the first 9 months of the year. It is not uncommon to see a strong pork cutout into October and recent reports suggest we may witness this again this year. Monthly domestic disappearance measurements are somewhat noisy, but the overall trend is clear. Domestic consumption has been above average for the majority of the calendar year.

Figure 2. Pork Domestic Disappearance

This phenomenon is in part due to pork’s competitive standing against competing proteins. Beef production is at its lowest level since 2017 and is expected to continue to decline into 2025. Broiler production is 2.6% lower YTD. Both of these protein complexes have witnessed increased retail prices, displacing protein demand elsewhere. Having bacon on the side of the pork complex certainly helps maintain demand, too.

A discussion on pork demand is incomplete without a nod to the export markets. High pork prices in Europe have led international buyers to seek alternatives for their pork product needs. Pork exports are 4.4% higher YTD on a carcass weight equivalent basis.

Figure 3. Monthly Pork Exports

Mexican pork import demand from the U.S. is running at a record pace YTD. Interestingly, exports to South Korea, Central America, and South America are also posting double digit percentage growths so far this year. While outstanding export sales on the books are near average for this point in the marketing year, last week’s export cutout volume indicated there remains robust international pork demand for the time being.

Figure 4. Outstanding Pork Export Sales

Feed Costs

Much has already been written about the corn and soybean complexes throughout the growing season. As we enter the heart of harvest, both corn and meal prices sit at historically advantageous price levels for purchases despite the myriad of risks (U.S. election, lack of Farm Bill, geopolitical tensions, South American weather, etc.) inherent in the marketplace. Seasonally, both summer corn and soybean meal tend to move higher between today and next summer.

Figure 5. July Corn Futures Seasonal

Figure 6. July Soybean Meal Futures Seasonal

Hog Profit Margins

It is clear there is relative strength in the hog market in the face of increased production and fairly low feed costs with a seasonal tendency to increase in the coming months. We can examine historical percentiles to objectively evaluate what the market is offering. Every producer’s costs of production (feed and non-feed costs) and pricing mechanisms for their hogs are different. Risk tolerance will also 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 over the next four calendar quarters.

Figure 7. Combined Open Market Margins:

Figure 8. Quarterly Open Market Profit Margins

As of the writing of this article, the next 4 quarters offer a combined average margin of $10.41 per hundredweight. This ranks at the 87th percentile of historical profitability for this model operation. In other words, 87% of the time in the last 10 years the 12-month outlook has been less profitable than today. Interestingly, the majority this opportunity is due to favorable margins next summer. Opportunities abound to protect a profit throughout the next 12 months, something that seemed nearly impossible as recently as a year ago.

It could be prudent to layer into protection during those periods to secure at least a share of what the market is currently offering. Structuring this coverage will vary from producer to producer, but it generally makes sense to address both feed and hog risk simultaneously. Remember, 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

How each individual producer decides to structure their hedges will depend on their own unique profitability targets, goals, biases, and cash flow considerations. It is natural to focus on the bullish fundamentals of the market, and they can be compelling. But at times we must also take a step back and realize historically there has been more risk to the downside than opportunity to the upside from this point forward. As they say, a bird in the hand is worth two in the bush. While we may not want to remove all participation in better margins, it could make sense to remove at least a portion of the exposure to lower margin outcomes. Contact us to learn more about strategies to take risk off the table, maintain opportunity to better margins should they occur, and ultimately take control of your bottom line.