Demand Worries Weigh on Pork/Hog Futures | Profit Maximizer - Pork Checkoff

Demand Worries Weigh on Pork/Hog Futures

May 9, 2022

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    • Hog futures sell off as traders re-consider demand potential for the summer and fall market.
    • Pork and hog futures have slumped in the last two weeks as market participants reassess demand for the summer months. While we are still forecasting prices to increase in June and July, we have revised some prices lower based on current demand trends.
    • Export demand from China remains extremely limited but sales to Mexico have been robust, supporting higher prices for bone-in hams. Processors are also doing more boning and trimming of hams in house, which has also limited the supply available in the spot market.
    • Pork belly prices have declined, like what happened last year. We think this will encourage more retail ads in late May and June, resulting in higher prices a few weeks from now.
    • Pork trim prices were sharply lower but seasonal demand and lower supply remains supportive in the near term.

Markets Adjust Lower as Demand Concerns Mount. How Much Risk Is in This Market and on Which Side?

A couple of weeks ago we issued our long-run budget planning forecast, showing price inflation for beef, pork and poultry items. The assumption embedded in that forecast was that consumer demand would be robust, supported by strong consumer balance sheets, high levels of consumer wealth and steady gains in consumer meat preferences. However, there are significant concerns about the economic environment and the potential for the economy to dip into a recession in the next 12-18 months.

Equity markets have expressed that concern as the S&P index has lost 8% in the past two weeks. Livestock futures, especially hog futures, have also seen a sharp correction as market participants look to price a weaker demand environment. We have as a result updated some of our price forecasts to reflect a more bearish demand picture. While the focus often tends to be on the supply side, considering demand implications is important. That is especially as we think about the downside potential following last year’s dramatic price increases

The chart below illustrates how we see the demand curve for pork and events that have impacted demand in the last 20 years. The chart outlines the relationship between per capita pork disappearance in the domestic market vs. price. The idea is to see what price consumers are willing to pay for a given supply of pork. The resulting curve from these price/supply pairs is representative of the demand for pork during a given period. While simplistic, this helps us visualize the effect of changes in supply on price.

The chart shows domestic supply availability and thus domestic demand, it strips out the effect of exports. What it does not tell us is the effect that fear has on near-term demand. For instance, if you are a buyer that is worried about Chinese buyers coming in and cleaning up the market or PEDv resulting in a shortfall in supply, then we could see inventory building and product accumulation that may appear like a surge in demand. We saw some of this in 2014-15.

When constructing this chart we need to adjust for inflation. That way we know that the reason why people are paying more for pork in 2021 is not because their dollars are worth less but because they really want to consume more pork. We converted the whole price series to 2021 equivalent dollars. The price of the pork cutout in 2021 was $104/cwt and that’s what’s represented in the chart. In 2001, the value of the pork cutout was $66.9/cwt but that is the equivalent of $96.97/cwt in 2021 dollars and that’s what’s shown in the chart as well. We are assuming that the PCE deflator (CPI-like index that is preferred by the FED) will be 6% in 2022 and 4.5% in 2023. Our current forecast is for the 2023 cutout to be $103/cwt, which is the equivalent of $93/cwt in 2021 dollars.

The constructed chart also helps us understand periods when pork demand has shifted. Whether it was the Atkins Diets in 2000-21, the Mad Cow disease in 2004 or the spread of PEDv in 2014, there have been instances when pork demand has clearly shifted above long run demand of the past 20 years. Last year pork demand was the best in at least 20 years (see 2021 point in the chart). But the chart also points to periods when pork demand has taken a hit. In 2002 the recession caused demand to drop significantly compared to where it was in 2000 and 2001, despite the shift in preferences due to the Atkins Diets. The Great Recession of 2008-09 also resulted in a significant drop in demand.

We have revised down our forecast for the value of the cutout in 2022, from $112/cwt previously to $108/cwt (nominal dollar values). As you will see we are now below the high demand curve for this year but still above “normal” demand levels. For next year our pork cutout values are back to the demand curve we have seen the last 20 years. The risk is that if the economy does go into a recession, prices could be even lower. Where would pork cutout be if we were to go back to where demand was in 2009? That would probably imply a pork cutout at around $85/cwt in nominal dollar terms, a 20% decline from 2022 levels. This is not a forecast, or something we anticipate. But it highlights the significant demand risk in this market as the FED raises interest rates and tries to bring inflation under control

Price Charts


Weekly Pork Price Summary

USDA prices for pork sub-primals, including butt, loin, ham, picnic, belly, trim, and spareribs.

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