International Events Increase Inflation Risks

Russian invasion of Ukraine slams commodity market.

While impact on global pork demand will be minimal, spike in grain and oil prices is inflationary for meat prices, including pork.

There is ongoing speculation as to whether sanctions imposed on Russia will impact the global meat trade. Russia used to be a major buyer of proteins in the world market. We still remember when prices for chicken leg quarters in the U.S., or the price of beef in Brazil, or pork prices in Europe would be greatly affected by events in Russia. That is no longer the case.

In the last decade, Russia has worked very hard to become self-sufficient in meat protein. The chart shows Russian beef, pork and chicken consumption since 2000, and how much of that consumption relies on domestic production and imports.

As recently as 2010, Russia relied on pork imports for about a third of its pork consumption. However, in 2021 USDA notes that Russian domestic pork consumption was 26% higher than in 2010 and the country was a net exporter of pork. Despite ASF, Russia increased its domestic pork output by 86% during this period and eliminated its dependence on imports. Chicken consumption has also increased during the last few years with imports accounting for only about 5% of domestic consumption. As for beef, imports still account for a share of consumption although high cost and limited availability have resulted in a notable decline in domestic consumption. Most of the beef imports in Russia come from either Belarus (a close ally) or Paraguay.

While sanctions are not likely to have an immediate effect on the global meat trade, the effect on livestock production inputs (feed and energy) is expected to be significant. Russia and Ukraine are some of the biggest global grain producers and exporters. According to USDA, Ukraine accounted for about 16.4% of the supply of corn traded in the global market during 2021-22. Russia was only a minor supplier at just 4.5 million MT or 2.2%. With ports in the Black Sea region closed, buyers of Ukrainian corn will now have to look elsewhere.  The new corn planting season in Ukraine is around the corner if the war persists, there are now doubts as to how much of the new crop will be planted. Corn futures are now over $7/bushel as market looks to ration demand while at the same time providing a strong enough incentive for corn producers in other parts of the world to ramp up production. Russia and Ukraine account for a larger share of global market for wheat and barley, key feed grains in Europe and other parts of the world. Rising feed costs will tend to increase breakeven costs for livestock producers and higher prices at wholesale/retail will be needed as a result.

Pork Futures for the Summer Trend Up as Market Tries to Price Supply/Inflation Risks

Pork cutout futures are currently trading at a little over $123/cwt. This is a 2% premium to the historically high price levels reached a year ago and a 45% premium to the five-year average before the COVID outbreak. Market participants have been clearly caught by surprise by lower hog numbers coming to market. The situation does not get better as we go into the spring and summer, when hog supplies are seasonally lower. Disease outbreaks, especially in the Upper Midwest, have been much more significant than expected and market participants are revising their projections down. High feed costs, export uncertainty and potential disruptions in sales to California have prevented hog producers from expanding.  While USDA remains optimistic (or behind the curve) about pork supplies during Jun-Aug, the latest Steiner Consulting forecast puts pork production for the quarter at 6.48 billion pounds, down 0.8% from a year ago. USDA is still expecting a 2.8% y/y increase in pork production. Pork exports have declined compared to 2019 and 2020 as China is no longer a major buyer of US pork but exports to other markets, especially Mexico remain robust. US pork exports to Mexico are expected to surpass 2 billion pounds in 2022, more than double what they were in 2010.  The combination of lower production and still robust pork exports means that there will be less pork available in the domestic market. Steiner expects Q3 per capita pork availability (domestic consumption) to be down 2.4% from the previous year and 7% lower than in 2019. The lower supply comes at a time when pork demand remains excellent. Consumers are facing significant price inflation in every aspect of their life and pork continues to offer excellent value.  The price of boneless pork chops at wholesale is today trading as much as $1.20 under the price of boneless/skinless chicken breasts and $1.40 under the price of ground beef (80CL).  Five years ago, chicken breasts were at a 25 cent discount to boneless pork loins and ground beef premium was only 40 cents.

Pork Cold Storage Update

Pork supplies in the freezer were tight for much of last year and freezer stocks were even lower in January of this year.  The total supply of pork in cold storage was estimated at 428.5 million pounds, 6.3% lower than a year ago and 22% lower than the five-year average.  Ham inventory was especially light following the sharp depletion during the holiday period. Packers continue to struggle to run ham boning lines and the supply of boneless hams in storage was 49.3 million pounds, down 21% from a year ago. The inventory of bone-in hams, on the other hand, at 24.4 million pounds, 12% higher than last year.  Processors and packers appear to have put more bellies in the freezer during late December and January as the inventory increased 17% from the previous month and at 44.6 million pounds it is now 43% higher than a year ago and 4.4% higher than the five year average. Normally we see belly inventories increase between January and April but with prices now at the highest level since last August, we expect to see only minimal increase in belly stocks during February and very likely March as well.  The inventory of ribs in cold storage remains limited, currently at the same low level is was last year and 20% lower than the five year average. Normally end users will accumulate ribs during Q1 to meet demand in late spring and summer. Current inventory levels and expected lower slaughter present more upside price risk for ribs during the high demand time of the year.

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