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Swine Industry: Lessons from Trade in 2020

Hopefully the title of this article doesn’t make you turn and run! It is important to look back on the 2020 year and try to make some sense as to what happened - not only with the swine industry, but society in general. That way, we can take the few best parts and learn from our experiences. We are all too aware of COVID-19 and the ramifications that have followed. But what value can we take away from such a challenging year to make individual operations, and the swine industry, better?

Let’s start with a positive first. Looking at exports YTD through October, total exports are up just under 20% from a year earlier. Leading the way is China, with an astonishing increase from a year earlier of 176% higher sales. Is this finally the boom everyone has been talking about for over a year now? Maybe, but the key question is how long can it last?

I am sure by now everyone as seen the recent article on Muyuan Foods investment in a mega complex that will house 84,000 sows. Even with ASF devastating China’s swine industry, with obscene profit levels, capital investment in swine facilities will continue to pour into China. It is anybody’s guess how long it will take China to rebuild their swine industry. One constant, however, is their government’s commitment to food sustainability. With that type of commitment by the Chinese government, is it prudent to relay on them as a long-term trading partner? All you have to do is look at Australia beef for that answer.

Australia banned the 5G technology for their mobile network by Huawei over national security concerns and in retaliation, China banned Australian beef. Unless the U.S. can sign a free trade agreement with China that removes trade barriers and levels the playing field, we need to refrain from overbuilding our industry. It has been estimated that China will rebuild their swine industry within four years, at which time they will return to pre-ASF import levels. The obvious question we all need to answer is are you willing to invest in 30-to-40-year assets without a long-term commitment?

In addition to trade, economic indicators would say we remain at current levels of production at best. If you are fortunate enough to sell your hogs on a cutout contract, you are making some money. If you are stuck with a cash-indexed price, you continue to lose money. Looking forward for the next 12 months, the average producer selling hogs tied to futures with a historic basis is breakeven at best.

The biggest takeaway I have seen working with swine producers this year without a doubt is their resiliency. 2020 has been hard for many industries, but swine producers made difficult decisions early to cull market hogs or pigs throughout their entire system. These were very stressful decisions that had to be made as packing plants closed across the country. Though looking back at this, with the efficiencies we built into the industry, it didn’t leave any room for a black swan event such as COVID-19. As an industry, should we continue to maximize plant capacity going forward or try to create some room for the next black swan event?

As we look forward to making long-term decisions with our operations and in the industry, I believe each producer needs to answer the questions above. The U.S. swine industry is mature and relies on exports for additional growth. We need to continue to build relationships with reliable trading partners first.

Steve
Malakowsky

VP Swine Lending
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