Pork pile awaits as trade wars pose risk to exports
Donald Trump’s trade wars are making pork a bargain.
American production is poised to reach an all-time high this year, and output is forecast to surge again in 2019. The supply boom comes as tariffs from China and Mexico threaten to curb export demand, leaving Americans with a mountain of cheap meat.
On Saturday in Dallas, as many as 30 people on a local bacon-focused food tour were set to traverse the city chomping down on bacon donuts, bacon brown sugar ice cream, bacon jam and candied bacon. While retail bacon prices are down in the past 12 months, they’re still up from six years ago, so any relief from higher costs will be welcome news to the pork enthusiasts.
“It’s almost like a bonding experience,” said Jeanine Stevens, the owner of Dallas Bites! Tours, which takes participants to little known restaurants and other eateries. “Bacon is a kind of food that people just feel a little bit lighthearted about. It’s a fun food.”
Other Americans might agree. The U.S. Department of Agriculture is predicting overall pork consumption next year will climb to 53.3 pounds a person. That’s the highest since the early 1980s.
But the demand swell isn’t enough to make up for the gains in production, and hog futures are trading near their lowest for this time of year since 2002. “Unprecedented change” is expected for global pork exports in the second half of 2018, and rising supply will pressure the U.S. market the rest of the year, Rabobank analysts including Chenjun Pan said in a report emailed Friday. Hedge funds just more than doubled their wagers on price declines.
Part of the reason demand hasn’t rescued prices is because pork is vying against cheap chicken and burgers. Total U.S. meat production is forecast at a record in 2018 and is set to climb again next year, says the USDA.
Cash hogs may average about 42 cents a pound in 2019, down 7.7 percent from this year, the department predicts.
For hog futures, “the risk going forward is we have huge numbers of hogs coming at us and huge numbers of beef and poultry,” said Don Roose, president of U.S. Commodities in West Des Moines, Iowa.
Hedge funds raised their net-short position in hogs to 8,718 futures and options in the week ended July 10, according to U.S. Commodity Futures Trading Commission data published Friday. The holding, which measures the difference between bets on a price increase and wagers on a decline, compares with 3,260 a week earlier. Total short holdings jumped 12 percent to the highest since the data begins in 2006.
Hog futures for October settlement fell for five straight weeks through July 13 on the Chicago Mercantile Exchange. On Monday, the price dropped 0.7 percent to 54.9 cents a pound at 8:46 a.m.
The glut of meat isn’t likely to shrink soon. U.S. pork packers have been opening more processing plants and another is expected to come online in 2018, CoBank analysts said in a June report.
“With that increased capacity, producers are unlikely to pull back hog numbers as long as prices are covering variable costs,” the analysts said.
Still, what’s been a boon for carnivores is hurting American farmers.
Tariffs from China and Mexico mean “40 percent of total American pork exports now are under retaliatory tariffs, threatening the livelihoods of thousands of U.S. pig farmers,” the National Pork Producers Council said in an emailed statement on July 6. “We now face large financial losses and contraction because of escalating trade disputes.”
That spells trouble for Maschhoff Family Foods, a pig producer in Carlyle, Illinois. The hog unit could post a loss of $100 million in the year that stared on July 1, according to Ken Maschhoff, chairman of the company. That would be a record loss in a 12-month period for the operation, which sells about 5.5 million hogs a year from 550 farms across nine states.
Rather than expand domestically, the company may invest in hog production in Europe or South America if trade tensions persist, he said.
“We had anticipated kind of a decent 2018 year, with a break-even 2019 year, and now both years will be in the red for us,” Maschhoff said.
General Electric said it remains unconvinced that demand for Boeing’s potential midrange aircraft, nicknamed the 797, will be enough to justify developing a new engine for the jet.
The U.S. turbine maker needs to do more work on the proposals, especially since Boeing has yet to decide whether to recruit an exclusive engine provider or involve two competing suppliers, GE Aviation chief David Joyce said Monday at the Farnborough air show.
“We’re still wrestling with what the size of the market is,” Joyce said in a media briefing. “People feel great when you launch, but shareholders don’t feel great until you’re successful.”
Joyce’s caution underscores the uncertainty around Boeing’s propulsion strategy as the planemaker crafts plans for the so-called new midmarket aircraft, or NMA, which it envisions as succeeding its 757 and 767 models and halting Airbus’s success in edging into the niche with the popular A321neo. Boeing is mulling a two-jet family with 220 to 270 seats designed for 5,000-mile routes, available by 2025.
The decisions to launch the NMA and select engine suppliers probably won’t be made until next year, Boeing Chief Executive Officer Dennis Muilenburg said in an interview at the aerosapce expo in the U.K.
The Chicago-based planemaker is evaluating all options for the turbines and having productive discussions, he said.
GE is bidding for the engine contract through CFM International, its joint venture with France’s Safran. United Technologies Corp.’s Pratt & Whitney division and Rolls-Royce Holdings have also prepared proposals for the aircraft, which is the only all-new jetliner in the pipeline among the four largest planemakers.
One potential customer for the plane, Avolon Holdings, is convinced Boeing will opt for two engine suppliers despite the risk that the market may not be large enough for both to see much return on the investment.
“If I was a betting man, I’d think Boeing will go with a dual source,” Domhnal Slattery, CEO of Avolon, a Dublin-based aircraft leasing firm, said in an interview. “They want to give maximum optionality to their airline clients. They want to create maximum tension on pricing. And they want to mitigate technology risk.”
Given concerns over teething issues in current-generation engines, many airlines would prefer to have a choice among new models developed for the Boeing plane. Slattery sees demand for about 3,000 to 4,000 jets in the segment targeted by Boeing.
Airbus would probably claim about half that market, Slattery said, with the remainder split between Boeing’s two NMA models. That would leave relatively small slivers for the engine makers, assuming there are two suppliers.
And if Boeing misses the 2025 targeted entry date, demand could shrink as airline customers find other aircraft to replace aging 757 and 767 jets.
Another challenge: bringing manufacturing costs down to the point where Boeing could profitably charge the $70 million or less that major customers are willing to pay.
“I’m sure they’ll build a good airplane, a fantastic airplane in fact,” Slattery said. “But the price they want will be very, very critical.”
GE’s Joyce said that CFM, which specializes in narrow-body jets, will spearhead negotiations with Boeing rather than GE. That’s despite the possibility that the NMA engine will be required to exceed the 50,000 pounds of thrust that represents the upper end of the alliance’s agreed remit.
“Even if it sneaks a little bit north of 50,000 thrust, we would still consider it to be in the spirit of the JV,” he said. “We are very respectful of the spirit of the JV and not the letter.” It’s also yet to be determined how many variants of the NMA there will be and what range of propulsion will be required, he said.
Joyce said GE turned down an opportunity to join Boeing in a joint venture to develop auxiliary power units that help start jet engines and provide electricity while planes are on the ground because it preferred to allocate capital elsewhere.