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What happens next? The global food (and pork) production, processing and distribution system is functioning but there are many, many existing kinks, new risks every day, new opportunities emerging and a host of collateral damage from political actions which make the future almost unknowable. Yet, most chain participants continue forging ahead, as they should, with the requirements of needed to get through day and essentially plan to deal with and innovate around whatever the next challenge might be, whether it arrives in an hour, next week or next month. With the arrival of ASF in the Dominican Republic it is nearly certain that it will now enter the US, probably through Miami. Because of the ordered kill in the Dominican Republic, there will be people trying to “save” their “healthy appearing” hogs by slaughter and freezing or selling to Miami or Chicago brokers under the table. We begin with a look at the broader economy and then focus on pork.
We are so unmoored from “normal” that it makes sense to situate the current industry (in the US primarily, but also around the world) within the current macro environment. One of the first consequences of the pandemic was the disappearance of demand for many key services and certain products which did not make sense during a pandemic like gasoline (nowhere to go). Things like travel demand ground to a halt and all the associated services from flights, to travel agents, to corporate booking companies, sales and training meetings at hotels, hotels themselves, restaurants, and taxis to name a small fraction of related services saw a demand collapse.
In its place, online demand for food and other products escalated dramatically, especially investments in the home. For instance, it was estimated recently that almost 75% of US homes underwent a significant remodeling, new carpet or wallpaper etc., or a building project like a new deck during the last year. The point is, there was a big shift in income allocation by households toward hard goods (washing machines, remodeling supplies, electronics, web cams etc.). This was fueled by both savings from services spending and the savings from decreased travel including gasoline/diesel fuel purchases from idled cars and trucks. In addition, most first world economies larded consumers with overgenerous income transfers to support continued spending and made foreclosure on missed housing payments essentially impossible for landlords to execute. The unemployment benefits were so generous that it is now impossible to get 30% of service workers to return to work even with large wage increases.
This dramatic increase in demand for hard goods overtaxed Chinese (and other Asian) manufacturing and associated container shipping creating a nearly unprecedented shortage of shipment containers and big delays in both finding a pathway out of China (Asia) with exports and a spot in the major ports of the US and EU to offload. The export of time sensitive perishables such as pork has been affected. Days and weeks of delay are common. Normally, a premium can be paid to slot your container for immediate departure, but rates have already tripled, (quadrupled to the EU from Asia) and the “premiums” are now built into the current prices.
Just when things might have moved toward resolution, the Suez Canal was blocked for days and days by a large ship that become grounded transversing the entire canal. Add to that one or more of the biggest exporting port cities in China is in the middle of a major Covid resurgence, meaning dock workers and exporters were quarantined at home. On top of this, government actions such as vaccine passports and contemplated actions such as forced contact tracing and quarantine with exposure to Covid, creates emerging restrictions which threaten to further disrupt supply chains, throttle certain recovering demands, and lead to potential shortages of food and other goods since truckers, store employees and processor workers may be forced home against their will.
A significant number of people in the United States will never choose to be vaccinated, perhaps 30-40 percent. If airlines and cruise ships and other service providers either decide to or are forced to require vaccine passports for travel, for restaurant and for store entry, or to use Uber/Taxis or public transportation, expect the newly emerging demand, which is red hot right now for these services to plummet again. All of this will create huge labor shortages, spiking wages, supply chain disruptions, shortages of products and runaway inflation as it continues to reshape societies into millions of mini hermitages with touchless purchasing and home delivery strengthening and perhaps prevailing for the long term.
So far, food demand for consumption at home went straight up as restaurants closed, though some have effectively shifted to home delivery or pickup windows strategies at fast food and some sit-down restaurants. Concerning pork in particular, the huge import demand from China has cooled considerably as a subset of the largest Chinese producers have successfully achieved near pre-ASF levels of production, but some of the building and site strategies, primarily to ensure biosecurity, have built-in historical problems which may or may not be realized in the coming months and years. Time will tell. Here I am speaking of extremely large, single-site production which deploys a kind of medieval fortress strategy. Historically, when the enemy came, everyone temporarily moved into the fort and behind the castle walls. Keep in mind the enemy often found ways to get over the walls.
In the US, skyrocketing building costs (remember those home projects and new housing starts have exhausted the supplies of building materials) and the fear of newly emergent and highly destructive PRRS 144 which can wipe out 4-7 weeks of production and cause sow mortality in the low 20% range in a very short period, has dampened most expansion projects. This has caused the US price to finally descend almost to the “normal” level going into the fall, but feed costs are substantially higher than the last five years. Demand is steady and supply is remaining just under full packer kill capacity, so profitability is expected to be in place for the next several months. However, food costs are rising quickly, and many retail pork products are from 20% to 100% higher on a price/lb. basis. So far this is not causing a large problem as the savings from eating out (profit to restaurant) is covering the raw meal ingredients but the convenience is gone with home cooked meals. So far, the unusual spikes in costs and prices have calmed some and the price patterns for pork are returning to normal. Don’t allow yourself to believe that this is signaling a return to less turbulent times. More on that next time.
