COVID Wave Drives Market Volatility
January 17, 2022
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• Hog slaughter last week was about 100k head less than what we expected and 9% lower than the previous year. Packers continue to struggle with higher rates of absenteeism among workers and inspectors, limiting the amount of pork coming to market.
• Pork prices remain extremely volatile, with spot supply varying greatly depending on how much product packers are able to bone/trim in a given day. Ham primal value is a great example, with the value on Thursday jumping 50% from the previous day but then down 22% on Friday.
• Pork belly prices have improved in the last two weeks due to tighter supply and the need to start building inventories for the spring.
• The decline in slaughter and lack of boning/trimming has caused pork trim prices to jump sharply higher. We expect trim prices to ease a bit but higher prices likely in the spring.
Pork Supply Growth to Remain Limited Through Summer But Demand Will Be the Deciding Factor for Inflation
Pork production declined 2.3% in 2021 but that followed a 2.5% increase the previous year. Some of this was due to the disruptions created by COVID in 2020, first backing up hogs and forcing producers to liquidate and then limiting the supply coming to market this year. As we noted in our update two weeks ago, we do not expect much of an improvement in US pork supplies in 2022. Our current forecast is for pork production in 2022 to be 27.390 billion pounds, 0.9% lower than the previous year, with much of that decline coming in the first half of the year. The breeding herd is down 5.7% from its peak in late December 2019 and high feed costs, export uncertainty and California sales restrictions have prevented producers from expanding despite good margins last year. Our current assumption is for US pork exports to be steady in 2022 while imports are expected to decline. As a result, we expect pork availability in the domestic market to be down 2.7% compared to 2021. This follows a decline of 1.8% in 2021 and 1.6% in 2020.
Hog futures were down for much of last week only to jump 300 points on Friday. The weakness reflected the slowdown in slaughter, with the final number for the week at just a little over 2.4 million head, about 100k head less than expected. A Reuters report earlier in the week noted that “Rising COVID-19 infections among U.S. workers have forced meat plants to slow production and the government to replace slaughterhouse inspectors, meat companies and union officials said.” The light kill numbers last week seemed to confirm this report. Cattle slaughter has been lower than expected as well, with slaughter for the week at around 620k head, about 30k head less than expected. But the slowdown in hog slaughter does not appear especially consequential for the cash hog market, which has been holding steady so far. It will be interesting to see what happens with hog weights in the second half of January and first half of February. Normally we would expect weights to move sharply lower. If they do not, then it could provide some support to the argument that the slowdown in hog processing is causing producers to get backed up. For now, that is just speculation not supported by the data.
Rising COVID cases and higher rates of absenteeism appear to be negatively impacting the ability of packers to process subprimals and the dramatic variability in the value of the ham primal is the best example of that. On Tuesday USDA quoted the value of the ham primal at $43/cwt, with some 4.5 million pounds of bone-in hams reportedly sold at $40/cwt. On the other hand the supply of boneless hams available in the spot market was extremely tight and boneless hams traded at 5.7 multiple to bone-in hams. By Thursday the primal value jumped to $82.3/cwt only to then drop to $64.2/cwt on Friday. The extreme volatility is nothing new, all one has to do is look at the daily chart in the second half of last year (see chart). On the positive side, fresh retail pork items continue to perform well, with loins and butts trading well above last year. Pork is very competitive at retail at this moment, with chicken breast meat hard to come by and ground beef prices up 25% in the last three weeks.
Weekly Pork Price Summary
USDA prices for pork sub-primals, including butt, loin, ham, picnic, belly, trim, and spareribs.