2 million pigs backed up on farms, plants still short labor, but there is good news

COVID-19 dealt a body blow to the pork industry. Christine McCracken, executive director of animal protein at Rabobank, breaks down the financial impacts of the pandemic on the animal protein sector globally. Here is the good, the bad, and the ugly, as well as the unknown.

The Good

Harvest levels at packing plants are normalizing.

The Ugly

We have backed up close to 2 million hogs on farms.

Most packers have the labor to harvest, but they don't have enough people to debone, trim, and get pork in boxes to retailers in a form they want. Some workers lack enough incentive to get back into the plant, or they fear catching the virus.

"In the short run, we are not going to be able to maximize the value of the carcasses," says McCracken. Retailers don't have the cooler space or the labor to slice product in stores.

Plants have spent hundreds of thousands of dollars on temperature scanners, barriers, personal protective equipment, and extra cleaning and sanitation just to keep the plant open, she says.

"We've raised wages in these plants. Are we going to be able to take them off once all of this is over? The higher costs that we have put in place are going to impact the competitiveness of U.S. pork going forward."

McCracken sees the possibility of more government involvement in the packing industry. "More stringent regulations add additional cost. If that becomes an issue, it could make us less competitive in the long run."

The Good

Consolidation of swine operations won't be as much as you might expect, says McCracken. "I don't see a lot of packers anxious to buy additional production assets, and I don't see the international investment in the sector."

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The Bad (sort of)

The industry is liquidating the least productive females and sow farms with ongoing disease issues. That means a shift toward higher productivity long-term, which may offset some of the sow liquidation, and create more pigs in the end. Let's not worry about that yet.

The Good

Pork sales at retail have been very good. The industry has done an exceptional job of getting product to the shelf.

The Bad

The availability of the product people want is a limitation. How the summer grilling season shapes up remains to be seen. Supply challenges and higher prices are going to be constraints, especially with unemployment so high.

The Unknown

We don't know longer term if consumers are going to be adaptable, says McCracken. How quickly will hotels, schools, and conferences come back, and what does that mean for breakfast meat demand? Does negative media attention around employee sicknesses and plant shutdowns translate into weaker demand for meat longer term? Plant-based companies are talking about a shift their way, and how animal-based products have real issues.

The Good and Bad

After record shipments of pork early in the year, when prices were low, China has now backed off. Demand isn't exceptionally high for protein in the summer, says McCracken, but China should step back in by fall.

"I would look for export demand to be a little softer, but that is probably good news because we don't have much pork to export," she says. "Exports may not be as strong over the summer months and that may allow us to get things back in balance. We are still a good source of low-cost protein."

As for African swine fever, China has brought in some genetics, which is a good indication they are getting comfortable with the outlook, says McCracken. "But it is going to be a few years before they rebuild that herd."

The Unknown (for Canada)

Besides labor disruptions at plants and food service shutdowns, Canada has seen a big drop in demand for their feeder pigs. What's going to happen with their sow herd in the long term? Could they restructure?

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The Bad (for Mexico)

The impact of the virus is even more severe in Mexico, says McCracken, because the country was already dealing with a tough economic situation with the drop in oil, a big part of their economy, and a 21% drop in the value in the peso, which increases the cost of imported feeds for farmers. The pandemic, and drop in tourism, has hit their protein sector hard. More of their chicken production is going to live birds.

"They are seeing a massive squeeze in margins," she says. "They really are struggling, and it's going to be a tough one for them. It's going to limit our exports into their markets over the next few years."

Conclusion

1. Look for a drop in pork production this year in U.S., Mexico, Canada, Europe, and Brazil.
2. Return to normal harvest levels.
3. Higher costs and more regulations for packers.
4. Large operations will absorb some of the weaker players in pig production, but international and packer investments in production are unlikely.
5. Exports will be a little slower in the near term but will remain a consistent driver of growth for the industry going forward.