High Pork Prices Despite Decline in Cash Hogs

November 8, 2021

Profit Maximizer Report

_{Steiner and Company produces the National Pork Board Newsletter based on information we believe is accurate and reliable. However neither NPB nor Steiner and Company warrants or guarantees the accuracy of or accepts any liability for the data, opinions or recommendations expressed.}

Highlights

• Wholesale pork prices continue to perform well as packers struggle to run full shifts. In the near term this is putting downward pressure on cash hog prices but bolstering the value of the pork cutout.

• Pork belly prices are expected to drift lower into the end of the year but prices should remain significantly above last year due to lower production, limited freezer inventories and ongoing concern about future inflation.

• Ham market has been a roller coaster. Buyers exporting product to Mexico were once again very active last week, with net sales over 18,500 MT, 58% higher than the average of the previous four weeks. We expect bone-in ham prices to firm up in the near term on export and seasonal demand.

• USDA reported a big quantity of pork trim sold to export last week as well, which we think went to South America. Pork trim prices remain firm.Please see the rest of the document for our detailed price summary as well as our forecasts for the next six months.

Download Detailed Price Summary and 6-Month Forecasts

Cash Hog Prices Now Back to Year Ago Levels but Cutout Still Up Double Digits On Supply Chain Bottlenecks and Tight Labor Supply

Cash hog prices have come under some pressure in the last couple of months due to seasonally higher supplies, ongoing labor issues at processing plants and uncertain export demand. But talking about “hog prices” is far more complicated today than it was 10, 15 or 20 years ago. Hogs these days are priced through a myriad ways that reflect both what gets negotiated in the spot market as well as the price of pork traded at wholesale (cutout) each day. Some formulas also account for special attributes (gestation crates, antibiotics used, etc).

The pricing will get even more convoluted once California Prop 12 goes into effect on January 1, 2022. For the week ending October 30, the price of hogs traded ranged from $62.90/cwt for negotiated hogs (carcass basis) to $80.77/cwt for hogs that were priced used the so called “other purchase agreements.” The two-day CME Lean Hog Index, which is used to settle the hog futures contract, was last calculated at $79.04/cwt. Additionally, one has to consider that packers today own/control far more of the hog supply than they did in the past. YTD packer share stands at 38%.

But cash prices are one of the components that goes into pricing the CME hog index and traders pay close attention to both direction and degree to which prices have pulled back. The average National negotiated cash hog price yesterday was quoted at $60.98/cwt, the lowest price since early February and only slightly above last year’s cash price. Hog prices in the cash market have come under pressure despite the relatively light pace of slaughter in the last few weeks. Last week hog slaughter was 2.551 million head, down 5.3% lower than a year ago and this week we think slaughter may be slightly under 2.6 million head, 3.8% lower than a year ago. In the last four weeks, hog slaughter has averaged 3.5% below year ago while the latest ‘Hogs and Pigs’ report implied a decline of 1.4%. Normally the low slaughter pace implies tight hog supplies and should correspond to robust cash hog prices. The fact that prices are declining coupled with a faster than normal increase in hog weights (see chart) suggests that producers may have fallen a bit behind in marketing.

While hog supplies are indeed lower than a year ago, challenges in staffing processing plants have contributed to the decline in slaughter and slowdown in marketings. Yesterday, for instance, USDA revised down its initial estimate for Monday slaughter, from 481k head to 472k head. Our guess would be that a plant did not run both shifts. Given the seasonal increase in hog supplies during this time of year, packers rely on Saturday slaughter to bolster capacity. But getting people to work Saturday shifts has become more difficult. Last week’s Saturday slaughter was 156k head compared to 249k a year ago and 239k in 2019. In the near-term hog supply appears to be plentiful relative to slaughter capacity. However, the hog inventory report implied a 6% y/y decline in slaughter starting in December. At that point the focus will start to shift from the near-term supply/capacity issues to post-holiday domestic and export demand.

U.S. Pork Exports Were Lower in September Despite Strong Gains to Mexico and Canada

Higher exports to Mexico were not enough to offset the lost export business to China. Total shipments of fresh/frozen and cooked pork in September were 175,029 MT, 11,514 MT or 6.2% lower than the previous year. Exports to Mexico, now our top market, were 68,898 MT, up 21,000 MT or 43.8% higher than a year ago. However, exports to China were just 16,732 MT, down 22,805 MT or 57.7% compared to a year ago. Exports to a number of other smaller markets were mostly lower as well. Japan and Canada were bigger pork export markets than China in September. Shipments to Japan were 28,338 MT, down 6% from last year while shipments to Canada were 20,092 MT, down 7.3% from a year ago. Exports of fresh/frozen pork only were 150,712 MT, down 11% from a year ago. This was a bigger than expected decline based on the weekly data, which showed a 9% drop.

Despite the decline in export volume, the value of U.S. pork going to export was up. Fresh/frozen and prepared pork export value was $507.9 million, $25.2 million or 5% higher than last year. The value of pork variety meat was $75.1 million, $16.6 million or 28% higher than a year ago. While pork exports to China were down sharply in September, the volume of pork variety meat was up 39% and the value of pork variety meat exports to China was $13.4 million or 36% higher than a year ago.