Processors adding capacity will create favorable conditions for producers.
DENVER – According to a new report from Farm Credit System member CoBank, global demand and the potential for profit are creating strong incentives for US pork producers to expand capacity. While this means favorable conditions for producers, it also means intensified competition among packers and possible short-term compression in packer margins.

“US pork packing capacity will increase eight to 10 percent by mid-2019, when five processing facility construction projects are complete and fully operational,” Trevor Amen, an economist with CoBank who specializes in animal protein said in a statement. “Hog production is expected to increase two to four percent in both 2017 and 2018 to meet the demand for more supplies, with the bulk of the increased production coming from small to mid-size pork producers in the Midwest.”

Two state-of-the-art facilities are being built in Iowa with another in Michigan. The three processing facilities will have the capacity to process over 10,000 hogs a day. In addition, smaller, 5,000 hogs per day, capacity facilities in Missouri and Minnesota are being renovated.

“As each of the new projects comes online, hog supplies will adjust upward,” said Amen. “Transitional market conditions such as these typically come with increased price volatility over the short term, and bargaining leverage will shift in favor of producers as the expansion of hog supplies catches up with processing capacity.”

Amen did add that lean hog prices might soften until the market stabilizes and an increase in exports fills the demand gap.

Global demand plays a crucial role in the increase in processing. Exports in 2017 are up 15 percent for the first quarter and annual exports are predicted to increase five to eight percent, with additional three to six percent increases in 2018. While exports have been a boon to US pork, the risk of disruption could produce major consequences.

“Continued global demand for US pork will be a critical factor as the market adjusts over the next two years,” said Amen. “Domestic consumer demand has been very strong and we expect that to continue. However, prospects for a further boost in domestic demand are limited. Therefore, export markets will have to absorb the production increases.”

Access to foreign markets are imperative to the prevention of a supply glut in the US, as well as smaller margins for both producers and processors, according to CoBank.

The CoBank report states that processors must make continuous improvements to facilities including new technology, automation and food safety mechanisms to comply with stricter standards to remain competitive.

“Historically, initial losses in new or expanded plants are inevitable and packer margins are typically narrower than pre-expansion,” said Amen. “But margins improve and normalize following the transition period and processors are better positioned with efficiency gains and an improved ability to customize production.”

The report goes on to say older plants with aging technology that inhibits efficiency could feel long term pressure. And given time, new investments will take the place of retired capacity and the cycle of replacing older infrastructure will reach the next phase.

For a brief video synopsis of the report, “New Processing Capacity Shakes Up the Hog Industry,” visit CoBank’s YouTube Channel