Global Downturn: How Will it Shape the U.S. Pork Industry?

With the news that the EU is officially in recession and all of the signs point to the same thing for the U.S., the swine industry in the United States is facing a critical challenge related to demand.  After more than a decade of continuous growth in demand for U.S. pork, the industry is likely to face the inevitable leveling off or much more likely, a decline in demand for 2009.  Some are forecasting up to 10% less exports for 2009.  As the EU and the US enter recession, demand for consumer goods has already begun to fall, in some cases at record month over month rates. 

The contraction in demand is multi-faceted.  A large portion of it comes from increased unemployment and a decline in real income as raises and bonuses for the employed are curtailed.  Another part of demand contraction comes from individuals and companies that are not currently affected by the downturn but are concerned they will be and a kind of fortress mentality has emerged to preserve available cash and cash flow. 

With the decline in the availability of credit, businesses and individuals who might temporarily build debt to fund on-going purchasing are finding it difficult or impossible to obtain.  On-going operations are increasingly being financed with cashflow which is either declining or threatening to decline. 

The third factor is the loss of wealth which has occurred in both retirement accounts for individuals and real-estate wealth which is happening for both individuals, who see their housing values decline, and businesses who own land assets.  There is a well researched link between perceptions of wealth and current purchasing, the "wealth effect".  If consumers believe their wealth is growing (through real estate appreciation or savings interest) they are optimistic about the future and purchase more both in cash and by accumulating debt.  If wealth is in decline, the opposite happens even though current income may not be affected.

The largest importing nations for North American pork are highly dependent on both the EU and the United States as importing nations for their consumer goods.  As demand for goods produced in Asia decline, Asian income will decline as will their purchases of consumer goods, while food purchases are likely to be economized.

It is hard to conceive that 2009 will be a growth year for U.S. pork production or any U.S. produced meat product.  Declines in pork production in Canada, Europe and in the United States which have occurred over the last 18 months position the industry to handle some of the decline in world-wide demand but will it be enough to spare the U.S. meat sector a bloodbath?  Judging by the decline in the value of the stocks of publicly traded poulty, beef and pork companies, the market is guessing it will be a bloodbath.  Could be general pessimism and uncertainty but the expectation is clearly for a recession in the U.S. animal production sector.  This will come no so much because U.S. consumers quit buying pork but because as they slow down purchases of imported goods, those countries will have a decline in growth and slow down purchases of U.S. pork. 

While food has not historically been purely "recession proof", its price cycle has not necessarily followed the consumer goods business cycle tightly.  However, now that all of U.S. agriculture has become heavily dependent on exports to clear annual production, the correlation of U.S. pork, poultry and beef prices with the general or global business cycle is likely to strengthen.  See: http://www.swinecast.com/hog-prices-0