Inventory Data Shows Pork Supply Growth to Remain Limited in 2022
January 4, 2022
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• USDA’s “Hog Inventory” report for December indicated that pork supplies will remain tight, at least through spring and early summer. Weekly hog slaughter should be around 2.5M head per week in January and February compared to +2.6M head per week in December.
• Pork demand, especially export demand, remains critical, however. Exports to China have slowed down considerably but exports to Mexico continue to run 15-20% above year ago levels.
• Domestic demand has been exceptional and it is expected to remain on a strong footing considering the high price of competing proteins and broader inflationary trends in the economy.
• High feed costs, labor issues and compliance requirements of the California Proposition 12 mandate have caused producers to reduce the breeding herd by 5.7% since 2019.
Pork Supply Growth to Remain Limited Through Summer But Demand Will Be the Deciding Factor for Inflation
Before we look at some of the key numbers in the report, released on Thursday, December 23, we should note that USDA continued to make some downward adjustments to its historical numbers. This was the case in the September report, and it continued in the most recent update.
The September 1 inventory of market hogs was revised lower by 735k head vs. what was published in September, with the biggest adjustment made in the number of hogs that came to market in September, October and early November. USDA makes these adjustments based on slaughter numbers. Additionally, USDA further lowered estimates for June inventories, pulling them back 1.2 million head. The most current number for June market hog inventories is pegged at 66.9 million head, down 2.5 million head or 3.6% compared to the initial estimate of June hog inventories published last summer. That is a huge miss that helps explain how significant PRRS losses were last winter and spring and the tight supply situation that developed during the summer and early fall months. Market hogs and supply implications for the next six months: USDA estimates that the total inventory of market hogs on December 1 was 68.021 million head, 4.4% lower than a year ago. This is on the low end of pre-report estimates, with analysts surveyed pegging the market hog inventory 2.9% below year-ago levels. Most of the discrepancy between analysts and USDA is on the front end. The inventory of market hogs over 180 lb. was 6% lower than a year ago and the inventory of hogs over 120-179 lb. was 6.2% lower than last year. These figures match up well with the USDA pig crop figures for Jun-Aug reported in the September survey. It was the analysts that could not believe the pig crop was down that much. These figures imply limited hog supplies during the Jan-Feb. Last year, weekly hog slaughter during these two months (excluding holiday/weather-shortened slaughter) averaged around 2.688 million head. This latest report suggests we should expect weekly slaughter in the next two months to average just a little over 2.5 million head. Futures have rallied in the last few trading sessions and the latest data is supportive for the nearby contract. With that said, the market will pay close attention to the demand picture at the start of the year, especially as China is now completely absent in the US pork export market and Mexico remains a highly opportunistic buyer.
The inventory of 50-119 lb. hogs was estimated at 19.185 million head, 2.5% lower than the previous year. This was close to pre-report estimates for a 2.7% decline. These hogs should come to market between late February and the middle of April, and the latest data would suggest weekly slaughter of around 2.46 million head/week during this period. Limited pork freezer stocks going into the winter months and a generally inflationary environment for proteins, the implied weekly slaughter data remains supportive for April hog futures, especially so if export demand from Asian markets starts to improve. In the past exports have been a key factor for March/April demand. The inventory of hogs under 50 pounds was estimated at 21.174 million head, 3.7% lower than a year ago and below pre-report estimates looking only for a 2.9% decline. These are pigs that will come to market between late April and late May, implying weekly slaughter of around 2.32 million head/week. If correct, these numbers are especially low and help explain why futures have been hovering in the mid to high 90s in the last few weeks. The latest report will do little to change that outlook and futures have been higher following its release.
Breeding herd and outlook for summer/fall: No big surprise regarding breeding herd numbers, with USDA pegging the inventory at 6.180 million head, about 10k head lower than in September and only slightly higher than a year ago. Analysts surveyed prior to the report were also expecting breeding herd numbers to be at the same level as a year ago. While producers have a mostly positive year in 2021, high feed costs, uncertain export demand and the disruptive effect of Prop 12 in California appear to have put the brakes on supply growth. Some producers likely used the improvement in profitability to shore up their balance sheets following the disastrous results in 2020. Implied gilt retention during the Sep-Nov quarter was about 12% higher than a year ago, but that’s because we are comparing to an extremely low-level last year when COVID caused hogs to get backed up on farms. Gilt retention ratio to sow slaughter is lower than the levels we saw in 2017, 2018 and 2019, pointing to producer reservations about expanding supply in light of current uncertain market. Producers indicated that they expect farrowings during Mar-May to be 0.8% lower than the previous year. This implies a pig crop for that quarter that is roughly the same as what we saw during Mar-May 2021 and flat growth in hog supplies next fall. This number is a bit higher than what analysts were projecting and may be construed as moderately bullish for hog futures next fall although volume that far out front is thin and there is plenty of uncertainty both in terms of demand and grain prices. Overall, however, the latest report is generally supportive of hog prices in 2022. As we move past the holidays, and with the inventory numbers priced in, market participants will start to focus more on domestic and export demand.
Weekly Pork Price Summary
USDA prices for pork sub-primals, including butt, loin, ham, picnic, belly, trim, and spareribs.