Hog Futures Gain as Cutout Values Outperform Expectations
February 1, 2021
Profit Maximizer Report
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Lean hog futures maintain premiums for the spring and summer on expectations of robust demand and lower slaughter.
• Poor weather conditions in Iowa caused some slaughter disruptions last week and yet overall slaughter was still over 2.6 million head. Hogs continue to come to market on the heavy side, which has bolstered pork supplies. Production last week was 1% higher than last year but 15% higher than two years ago.
• Good domestic demand and strong exports continue to underpin wholesale pork prices. The pork cutout is currently 13% higher than a year ago and 22% higher than two years ago, despite more pork coming to market each day.
• Ham primal value last week was 47% higher than it was in 2019. Mexico remains a big buyer, with USDA reporting shipments for the most current week over 18,000 MT.
• Pork inventory in cold storage as of January 1 was 30% smaller than a year ago and the inventory of hams was down 37%, both supportive of pork prices in the near term.
There was a lot of uncertainty at the start of the year about the outlook for pork/hog prices given expectations for higher slaughter and a potential slowdown in demand.
In the last two weeks, however, February hog futures have gained about 6% and April futures are up 7%.
For the entire 2021 futures are currently pricing hogs 42% higher than the COVID affected 2020 prices. Hog prices for 2021 are also 12% higher than in 2019.
As we noted in our last report, higher grain prices have been a big factor driving prices in addition to the improvement in demand. The grain export story received another boost last week as China booked the equivalent of 230 million bushels of corn.
At this time the amount of corn that has either been exported or is currently on the books to be delivered before the end of the marketing year represents near 85% of all
exports USDA has projected for the year.
And we are not even half way through the marketing year.
Higher feed costs may further pile on the pressure on hog producers to rein in any expansion plans and, more likely, encourage further liquidation.
Sow slaughter in December was 11% higher than the previous year but that was in part because of an extra marketing day.
In January there will be two fewer marketing days so even as weekly slaughter has been up the last two weeks, the total for the month will likely be lower than last year.
Our forecasted sow slaughter for the Dec-Feb quarter (using the quarters that correspond to the hog inventory) currently stands at 816k head, 29k head or 3.7% higher than the previous year.
More importantly, the ratio of quarterly sow slaughter to the breeding herd inventory on December 1 is currently projected at 13%. One has to go back to 2011 and 2012 to find a similar ratio, likely not a coincidence given grain market trends.
As for producer profitability, that is always a tough thing to figure out given all the different ways in which producers price hogs as well as the ability of hogs to hedge or integrate hogs in their overall production.
IA State runs a producer profitability model and for a farrow/finish operation they calculate that in 2020 producers lost an average of $2/head/month.
Using their model as a base, we calculate that $5.25 corn and $425 soybean meal pushes hog breakevens over $80/ cwt.
Consider that when you think about why futures are currently pricing 2021 hogs at an average $79/cwt, 42% higher than the previous year.
Tight pork cold storage supplies and a more inflationary outlook for Q2 helped bolster prices in the short term.
The combined inventory of beef, pork, chicken and turkey in cold storage at the end of December was estimated at 2.029 billion pounds, 10.6% lower than the previous year.
In the last five years, red meat and poultry supply at the end of December was about the same as at the end of November, this year the supply increased 1.2%, mostly due to more boneless beef going into the freezer.
Pork supply in cold storage remains significantly below year ago levels despite robust pork production during December.
Good exports and strong holiday demand has underpinned pork values and helped support the overall cutout.
With limited pork in the freezer and expectations of higher price inflation, it appears end users are more willing to build some inventory position. This continues to help the cutout in the near term.
The total pork inventory at the end of December was 408.4 million pounds, 29.6% lower than a year ago and 21.4% lower than the five year average.
Pork inventories declined 2.7% compared to the previous month vs. a 5-year 2.5% average drawdown in. Pork inventories were already quite low in November and inventory became even tighter in December.
Ham inventory was 53.6 million pounds, 37.6% lower than a year ago and 28.8% lower than the five year average.
Easter will be early this year and with less product in the freezer, processors have little time to shore up their needs.
Belly inventory was 30.7 million pounds, 54% lower than a year ago and 30% lower than the five year average. Given expectations of higher prices in Q2, the race is on to get some more product around.