Source: Rita Jane Gabbett, MEATINGPLACE, 6/21/16



Tighter pork supplies have squeezed pork packer margins slightly in recent weeks, but the outlook for domestic and export demand for pork remains solid and margins should hold up at least until the large pork processing facilities being built come online in 2017, according to BB&T Capital Markets.

Margins
Analysts Heather Jones and Brett Hundley anticipate pork packer margin expansion from the middle of the third quarter through the first half of 2017, but warned against expecting margins much higher than the robust margins of past couple of years.

Two smaller pork packing facilities scheduled to open late summer and early fall 2016 are likely to reach full first shift utilization by early 2017 and the large packing plants planned in Iowa and Minnesota should open in the third quarter of 2017.

“We continue to believe processing capacity expansion will exceed supply growth,” in terms of heads, not pounds, in the second half of 2017 and in 2018, the analysts wrote in a note to investors.

Demand
Demand has been generally solid as pork has firmly priced itself into retail promotions, ham formulations, and greater food-service emphasis, the analysts wrote.

The analysts were positive but somewhat cautious on future domestic demand “as we continue to believe that total protein supplies will become increasingly burdensome later in 2016 into 2017.”

The export outlook is relatively constructive, but notably that view is highly dependent upon China, they predicted, noting China does not appear in a hurry to expand hog production despite high prices. Government subsidies to hog producers were curtailed late last year.

“We are absolutely not asserting that [China] will not expand its hog herd from current levels or that imports will represent a very large proportion of its total demand. However, on the margin, we believe China's approach toward pork imports may have changed,” they wrote.

In terms of other export markets, they noted the peso is negatively impacting the outlook for Mexico. While Japan has increased domestic pork production, they still expect larger exports to Japan over the longer-term.

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