The Year That Wasn’t

This year was supposed to mark a comeback for U.S. pork producers. Instead, the industry faces volatile markets and unprecedented supply chain disruptions. COVID-19’s domino effect on farmers, processors, retailers and consumers underscores the complexities of our modern food system.

In late April, meat industry executives warned the United States could soon face a meat shortage after processing facilities closed temporarily due to the spread of COVID-19 among employees. Total meat supplies in cold storage facilities across the United States totaled roughly two weeks’ worth of production. With processing at a standstill, meat supplies for retail grocery stores were expected to shrink by nearly 30 percent by Memorial Day, leading to increases in pork and beef price prices of as much as 20 percent, according to analysis by CoBank.

Shuttered plants also meant that farmers had nowhere to send their mature pigs, creating a massive livestock backlog. While many meat processors have re-opened as of May 2020, hog farmers may yet be forced to euthanize as many as seven million pigs in the second quarter of 2020, a loss valued at nearly $700 million. The Food and Agricultural Policy Research Institute forecasted a total loss of $2.2 billion for the U.S. pork industry in 2020 due to the pandemic.

Going Whole Hog on Exports

According to the United States Department of Agriculture, the United States is the world’s third-largest producer and consumer of pork, shipping on average more than 5 billion pounds of fresh and frozen pork internationally each year since 2010.

But this dominant role in world pork trade is a fairly recent phenomenon. The United States became a net exporter of pork in 1995. Exports jumped from two percent of total production in 1990 to 21 percent in 2016. What made this spike possible?

The U.S. pork industry has gone through a major restructuring since the mid-1980s, shifting from small, independently owned operations to larger, vertically-integrated companies that contract with growers to raise pigs. This structure increased the industry’s productivity and year-round slaughter capacity. Between 1991 and 2009, the number of hog farms in the United States dropped by 70 percent but the number of hogs remained stable.

The National Pork Producers Council calculates that exports account for nearly 36 percent of the total $149 average value of a hog. While American pork is shipped to more than 100 countries, just four countries account for 75 percent of U.S. pork exports: Mexico, Japan, China, and Canada. It’s easy to see why implementation of the U.S.-Mexico-Canada Agreement is important to U.S. pork producers: Mexico alone accounts for about one-third of all exports by volume. U.S. exports of pork increased 1,550 percent in value since 1989, when the United States first implemented a free trade agreement with Canada.

U.S. pork producers mainly compete with pork producers in the European Union, Canada, and Brazil for sales in overseas markets. American farmers were concerned they could lose market share in Japan after the United States did not join the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) and Japan made a trade deal with the European Union. Japan is the largest value market for U.S. pork and the second largest market by volume. However, pork exports there have been trending higher in 2020 following the U.S.-Japan Trade Agreement.

Higher on the Hog in China?

For the last two years, American pork producers have found themselves in the crosshairs of a trade war between the United States and China, a key export market. In April 2018, China levied a 25 percent retaliatory tariff on many U.S. pork imports in response to Section 232 tariffs put in place by the United States. In 2019, China again retaliated against American pork, this time in response to Section 301 tariffs.

Before the trade war, China was the second-largest market for U.S. farm exports (after Canada). In 2016, China purchased nearly $20 billion in American farm products but sales dropped sharply in 2018 to $7.9 billion.

The “Phase One” U.S.-China trade agreement went into effect on February 14, 2020. It includes a commitment from China to import an additional $12.5 billion in U.S. agricultural products during 2020 on top of a 2017 baseline of about $24 billion. The agreement also provides access for a larger variety of U.S. pork products and restores access for processed pork products, which had been blocked by China.

As part of this deal, on February 17 China announced tariff exclusions for 696 products, including pork. In the first quarter of 2020, China bought $5.05 billion in U.S. farm goods, up 110 percent from last year. China’s pork imports almost tripled from March 2019, reflecting a major domestic supply gap caused by African Swine Fever (ASF).

However, concerns remain if it is feasible for China to meet the purchase targets set in the agreement. Through March 2020, U.S. Census Bureau data show that U.S. agricultural exports to China were only at 37 percent of year-to-date targets. The American Farm Bureau Federation found that U.S. agricultural exports to China need to accelerate by 114 percent each month from May through the rest of the fiscal year to meet the “Phase One” target.

Not Exactly “Year of the Pig” for Pork Industry

The possibility of U.S. sales to China going unfulfilled seems surprising. Another virus – ASF – has been ravaging China’s pork output since August 2018. ASF is a highly contagious, deadly pig disease with no known treatment or vaccine. It does not affect humans or food safety but it has had a devastating impact on China’s pork industry, the world’s largest, leaving a shortage in domestic supply.

Despite low officially reported cases of ASF, as many as 350 million pigs died from the disease in China during 2019. (And because the disease continues to spread across borders, one quarter of all the world’s pigs may die from ASF.) After more than a year of declining pork output, China’s total pork supply gap is estimated at 18 million tons – a figure much larger than total global supplies. Chinese consumers have faced record high prices for pork, traditionally their protein of choice. Some parts of the country also faced meat shortages due to disrupted supply chains during the COVID-19 quarantine.

To address persistent high prices, the Chinese government auctioned off a small amount of frozen pork from publicly held pork reserves, but the move was largely symbolic and had a limited short-term impact on prices. The government’s total pork reserve volumes are a national secret and not publicly available.

Enter: Coronavirus

As American hog farmers were positioning to fill China’s need to import more pork, enter the coronavirus in early 2020, which threw the U.S. pork market into extreme volatility.

After COVID-19 forced processing plants to temporarily close, U.S. pig prices dropped 27 percent in about a week, reducing profits for pig producers while consumers paid more for pork at the grocery store. The demand for meat often takes a hit during economic recessions as consumers keep a close eye on their grocery bill. At the same time, the industry lost major food service markets such as restaurants, universities, and elementary schools that were also shut down.

To help pork producers and other farmers, USDA on April 17 announced the Coronavirus Food Assistance Program (CFAP) to provide $19 billion in emergency aid to farmers and ranchers hit by market disruptions. CFAP includes $16 billion in direct payments to producers and $3 billion in purchases of fresh produce, meat, and dairy products for distribution through food banks. USDA will purchase an estimated $100 million per month in pork and chicken, along with other food products, beginning in May. Nonetheless, an industry-funded analysis by Iowa State University found that American hog farmers will lose $5 billion (or $37 per pig) due to reduced prices for pork and shuttered processing plants.

Saving Our Bacon

America’s pork industry has been beset with uncertainty in recent years. The latest Purdue University-CME Group Ag Economy Barometer found that the unknowns surrounding the pandemic have further decreased farmer optimism to a four-year low, with 67 percent of farmers saying they are worried about the impact of the coronavirus on their business.

Prior to COVID-19, U.S. farmers were already reeling from lost sales due to China’s tariffs. The saving grace for U.S. pork producers now is that pork exports are actually ramping up.

During March and April, the number of pigs slaughtered per day decreased by 40 percent, but shipments of U.S. pork to China more than quadrupled, including whole carcasses as well as products that Americans generally don’t eat, like feet and organs. The U.S. Meat Export Federation estimated that so far in 2020, about 31 percent of U.S. pork has been exported with one-third of that volume going to China.

That means that in the near term, increasing exports will remain vital for the U.S. pork industry to weather the coronavirus storm as processing capacity gets back online and domestic sales begin to rebound.

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