Shifting Assumptions Change Beef, Pork Outlooks

I have been forecasting meat exports for 20 years now. It can be a frustrating and humbling experience. Maybe as
a means to reconcile “wrong” numbers, I have realized that the value of my forecasts lies more in the forecast
assumptions than in the specific numbers themselves. For example, if the key assumption is a strengthening U.S.
dollar, and that trend changes the other way, my -3.4% pork export number for that year is less important than the
shift in assumptions. The actual forecast number will rarely be correct, but is derived by a sum of collective
assumptions. Changing assumptions indicate a shift in expectations beyond just numerical guessing. Thus, my
counsel is to “Pay more attention to the assumptions than the specific percentage of a forecast.

With that in mind, there have been two key shifts in assumptions that will have a broad impact on global beef and
pork trade: The extended Chinese hog cycle, and the extended U.S. drought in key cattle regions.

First, China hogs: China’s hog industry has largely been comprised of small/mid-sized farms. These are family
operations, some with a few sows, some with a few hundred. These operators are typically cash operators with
limited financing. And when margins turn red for an extended period of time, many liquidate heavily. In the last
notable Chinese agriculture survey (2017), these small and mid-size hog farmers comprised around 85% of the 40+
million hog farmers with the large-scale farmers making up around 15%. Through China’s ASF depopulation and rebuilding, heavy government support boosted their market share to an estimated 30-35% of the industry today. This support has created a prolonged downturn in Chinese hog prices; liquidation has been avoided by increased debt.

Chinese hog farmers have seen negative financial margins in 22 of the past 29 months. Historically, this would have
spurred liquidation that would have reduced the herd and led to a price surge sometime in the past 4-6 months. But
with increased capital, losses continue, and increased slaughter keeps prices low.

Going forward, liquidation can only occur in earnest as cash supplies dwindle. That day is coming, even in China’s
subsidized production system. Small to mid-size farmers are nearing their liquidity limits. Sows are sold to buy feed
for existing pigs, which ultimately leads to tighter supplies and higher hog prices. When, is anyone’s guess. My guess
is somewhere towards mid-2024.

China’s weak economy means that weak pork demand could also prolong this downturn. The weakest seasonal
pork demand in China is after Chinese New Year (February 10, 2024) through May. Rising prices after that could
lead to demand for imported pork into Q4 2024, an interesting scenario considering broad global liquidation
expected in North America, Europe, and China (85% of global hogs).

Over to cattle: A quick shift toward drought over the past 3 months has extended U.S. beef herd liquidation in
the Central Plains, Texas, and the Southwest. Dry conditions led to increased placements in the Cattle-on-Feed
(USDA) report in both September and October. This quickly shifted market sentiment away from very tight
supplies ahead. Live cattle futures (CME) now suggest more abundant supplies.

This shift leaves some cattle feeders with expensive calf and feeder inventories that carry high breakevens through
next spring. Look for a very moist spring across the Southeast and Central plains according to the recent forecast
by our friend and meteorologist Dr. Art Douglas. This may shift sentiment quickly into spring. And while prolonged
drought tempers expectations of how tight 2024 supplies will be, it ensures even smaller supplies post-2024.

In Australia, dry conditions spurred a market-crashing selloff. But according to our colleague Simon Quilty, these
low prices are at or near a bottom and correction is expected into mid-2024. These big weather shifts bear
watching in the global cattle and beef markets. The expectation of tightening supplies ahead is becoming more sure.

~ Brett Stuart