A Brief Pullback, but Higher Prices Expected in the Next Few Months
April 11, 2022
Profit Maximizer Report
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- Hog slaughter since early March has been 3.4% lower than a year ago, consistent with the results of the USDA ‘Hogs and Pigs’ report. We expect supply to seasonally decline in May and June. Our current projection is for slaughter to be 100k head smaller than currently by mid-May.
- Hog futures were lower last week as speculative funds cut back on their long positions for the summer months. However, futures still point to higher prices in the summer and fall futures are currently higher than a year ago.
- Pork belly prices were lower last week. This is usually the time when bacon processors are looking to book product for Memorial Day and packers need to get orders on the books. However, once new business is written, and with supply expected to be lower, we think prices will bounce back.
- Ham market remains volatile, reflecting the week to week ordering patterns from Mexico and waning season demand now that Easter business has been filled. We expect ham prices to be higher in the summer as hog slaughter declines.
- Fat pork trim have adjusted following the runup in February and March. Expect pork trim prices to be higher in the summer, however on seasonal demand, tight supplies.
Futures Pull Back from Pre-Inventory Report Levels, but They Still Point to Higher Prices in the Summer and Fall
The USDA issued the results of its quarterly survey of hog and pig operations on March 30. By all accounts, the results were “bullish” as most numbers in the survey were below expectations. Since then, June lean hog futures have pulled back, although they are still trading at a premium to current market. Probably a simple explanation is the adage of “buy the rumor and sell the fact.”
Coming into the report, there was a lot of talk of tight supplies in the summer, speculation about the bird flu impact on chicken supplies and prices and runaway inflation for meat proteins, etc. Speculative money was paying attention. The week before USDA’s report was released managed money had a net long 65,122 contracts. That position is not as big as it was last year but higher than in recent years. But building a net long position and holding on to it are two different things. The following week, the managed money net long position was down 9,623 contracts or 15%. The USDA report confirmed what the market was already trading, at least for the summer. Analyst estimates presented before the report release were clearly behind the market. They tend to be anchored by the results of the previous survey (breeding herd, historical trends, farrowing intentions).
Decline in the Size of the Breeding Stock Raises Concerns
In our view, the real surprise in the report was not the hog supply on the ground but the decline in the size of the breeding stock. This explains why June hogs have much more ground than deferred contracts. The chart above also reflects this, as hog and cutout values for Q4 and early 2023 are higher than the previous year. A smaller breeding herd on March 1 means a smaller pig crop during Mar-May and lower pork supplies in Sep-Nov. It is possible that those speculative summer longs may have concluded that the upside was limited, and it was a better idea to roll into fall and winter contracts.
While money flow may help explain the pullback in summer futures, there are short-term fundamental reasons that also help explain the pullback. We need to highlight the short-term factor. It is not unusual for pork prices to be sideways during Easter before moving higher in the summer. Towards the end of 2021, the value of the pork cutout had given up much of the ground gained earlier in the year. As a result, futures participants were not confident that a big premium for the summer of 2022 was warranted. Things quickly changed in January and February as the cutout rebounded and was running well ahead of 2021.
Futures players that thought June 2022 hogs were worth $97/cwt at the end of December were paying $120/cwt for June futures in February. The reasoning went that if the pork cutout managed to hit $110 in February, what would it be in June when supplies are seasonally lower and demand improves. But wholesale prices hit a wall in March. High summer futures also negatively impacted forward sales for fresh pork (see chart below). While we made some modest downward revisions to our forecasts for the summer and fall, you will notice that we continue to expect higher prices for pork cuts vs. current levels and, in some cases vs. the previous year.
February Pork Exports
Pork exports are off to a very slow start this year. The latest official statistics for February only confirmed the scale of the decline. Shipments of fresh, frozen and cooked pork were pegged at 164,353 MT, down 19.2% from the previous year and at levels similar to what we saw in 2018, before the outbreak of ASF in China. Indeed, it is the sharp pullback in Chinese demand that has contributed to the decline in exports so far and will likely continue to affect shipments through the spring and summer.
Exports to China in February were 12,718 MT, down 36,328 MT or 74%. The reduction in exports to China accounted for about 90% of the overall reduction in pork exports in February. Exports to Mexico have so far helped offset lower exports to a number of smaller markets. In February shipments to Mexico were 65,011 MT, 36.7% higher than a year ago. Exports to smaller markets were down as well, a function of the higher prices in January and February. Colombia in recent years has become a significant market but in February shipments were down 25%. The Philippines, another country impacted by ASF, increased US pork purchases in 2020.
Weekly Pork Price Summary
USDA prices for pork sub-primals, including butt, loin, ham, picnic, belly, trim, and spareribs.