New Processing Capacity Shakes Up the Hog Industry
- Strong balance sheets and rising global demand are incentivizing U.S. pork processors to expand capacity. When the five construction projects underway are complete, packing capacity will increase by 8-10 percent.
- The impending increase in packer demand for hog supplies will create more favorable terms for producers, and intensified competition among processors could lead to compression in packer margins.
- Prompted by the expansion in processing capacity, hog production will increase 2-4 percent in 2017 and another 2-4 percent in 2018.
- The success of such a substantial increase in processing capacity and production will hinge on export growth. We project exports to increase 5-8 percent in 2017 and 3-6 percent in 2018. However, greater export dependence increases the risk of a supply glut resulting from a trade hiccup.
- Historically, initial losses are inevitable in startup plants. And after the startup phase, packer margins are typically narrower than pre-expansion. Due to the rapid pace of this expansion, liquidity needs may be greater than in previous cycles.
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