After carcass prices for hogs topped out this past July, they descended later in the year and are showing early signs of continued recovery in early 2017.
Pork processors meanwhile are expected to have another highly profitable year after record-breaking profits last year. After several tough years, an expanding hog herd helped processors make money in every quarter from 2014 on. But last year was a standout year, with annual margins positive by $29.98 per head, according to HedgersEdge.com. The fourth quarter saw margins average $48.83 per head, with three weeks averaging more than $60 per head. Margins were positive every week of the year.
HedgersEdge.com margins also reflected the trend of what major pork processors reported in 2016. Tyson reported pork operating income of $140 million in 1Q 2016, $122 million in 2Q, $108 million in 3Q and a record $247 million in 4Q. It had record income of $528 million for fiscal 2016 (ended Oct. 1, 2016). JBS USA, which became the second largest pork processor after acquiring Cargill’s pork business, reported pork EBITDA of $102 million in the first quarter, $137 million in the second and $189 million in the third (bolstered by the acquisition).
USDA’s Quarterly Hogs and Pigs report in late December was somewhat negative for live hog prices for this year, but positive for processors. Its biggest surprise was total hog inventories as of Dec. 1. Pre-report estimates had put the total up 2 percent year-over-year but USDA’s number put it up 4 percent. The number of hogs kept for breeding was up 1 percent while hogs kept for marketing was up 4 percent. The increase in market hog supply came from a larger than expected farrowing number for September through November (up 4 percent year-over-year), as the Daily Livestock Report (DLR) noted in late December. Pigs per litter also increased versus 2015 but this number was up only 1 percent and in line with expectations. The increase in farrowings and ultimately market hog supplies is likely connected to the new pork plants which start to come online in 2017, says the DLR.
Declining feed costs
Chicken processors will continue to see sizeable operating margins again this year, with the key factor for this sector being the price of corn. Lower corn prices will reduce processors’ annual feed costs by hundreds of millions of dollars. Tyson, for example, saw its chicken feed costs decline by $170 million in fiscal 2016 from 2015. This helped it have operating income for the year of $1.305 billion for an 11.9 percent operating margin.
The 2016/2017 corn crop is expected to be tallied at just over 15.1 billion bushels, which should keep prices well under $4 per bushel. USDA forecasts that broiler production will increase by just over 2 percent from 2016. The key for poultry companies will be to keep finding ways to add value to a chicken and make it even more attractive to consumers to avoid them suffering from chicken “fatigue.” Consumers turned back to beef last year because more was available, and this will continue this year. Plenty of pork chops, ham and bacon will tempt consumers as well. So beef, and to a lesser extent pork, will remain the “meat treat” and chicken the “survival” food.