Latest Inventory Data Points to Slow Pork Supply Growth
July 9, 2021
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• Breeding herd on June 1 was estimated 1.5% lower than the previous year, setting the stage for a lower y/y pig crop this summer and lower hog supplies later this year and in early 2022.
• Hog slaughter was sharply lower this week as packers sought to manage supply ahead of the long holiday weekend. Pork production will be constrained in the next few weeks due to seasonally lower supply and lower carcass weights.
• Some fresh pork items have pulled back, not that holiday demand has subsided. However, labor challenges remain present and continue to affect labor intensive items. Also, seasonally lower supply will continue to limit availability of some products.
• Ham market remains volatile and highly dependent on export demand. Mexico has become the top market for U.S. pork and continues to significantly impact ham market trends.
• Pork belly prices should see some support in July but the trend is expected to be lower in late August and September.
Lower Y/Y Supplies Expected for The Fall and Spring of 2022, But Demand Still a Key Wild Card for Pricing
The results of the USDA quarterly survey of hog producers were published on June 24 and we viewed the results as largely neutral given that they came in fairly close to pre-report estimates. Money flow and outlook for meat prices has been a key factor behind futures price moves recently and there was little in the latest inventory report to change that. Below are some key highlights/implications from the report.
Current Hog Inventories
This was the first time since June 2014 that the June 1 hog inventory was lower than the previous year. Supplies clearly are lower than the previous year given the disruptive impact from COVID-19 outbreak a year ago. However, the USDA survey showed that front end supplies may not be as tight as some analysts were thinking.
Coming into the report, the average of analyst estimates suggested a 2.6% decline in the number of market hogs and the USDA survey number was only 0.3% above that. However, there was a fair amount of disagreement regarding the supply of hogs expected to come to market in the summer, with some estimates pegging the inventory of hogs available for marketing in June down as much as 9.6% from a year ago.
USDA estimated the inventory of hogs weighing over 180 pounds at 13.6 million head, 1.5% lower than last year but 4.4% higher than the inventory two years ago.
So far the number of hogs that have come to slaughter disagrees with this inventory assessment and it remains to be seen if the survey has failed to capture the reality on the ground. Slaughter during the first week of June was lower due to the holiday mismatch but in the following two weeks slaughter was also 0.2% lower than the same period in 2019.
If the USDA survey number is correct, this would suggest producers have more hogs on the ground than what has come to market so far. The latest numbers would suggest a somewhat more bearish hog supply outlook and seem to support the recent action in futures. Or at least it will not do much to change the current dynamic.
The inventory of hogs 50-119 pounds was estimated at 19.3 million head, 2.7% lower than a year ago and 1.7% lower than two years ago. These are hogs that would normally come to market between mid to late August and first part of October, impacting the October hog contract.
In 2019, non-holiday weekly slaughter during the second half of August and September averaged 2.575 million head/week. The latest survey results would suggest weekly slaughter around 2.53 million per week for this period. Slaughter in 2019 averaged 2.68 million head per week in the first week of October and the latest survey results suggest slaughter under that level but still above 2.6 million head.
Breeding Herd and Farrowings
The June 1 hog breeding herd was estimated at 6.230 million head, 1.5% lower than year ago levels and just 0.2% higher than on March 1.
Sow and boar slaughter during the period Mar-May was 3.7% lower than the same period a year ago. Additionally, we estimate that gilt retention during this period was 1.5% higher than the same period a year ago. Sharply higher feed costs likely impacted producer growth decisions despite a significant improvement in near term profitability.
Analysts polled ahead of the report on average expected the breeding herd to be down 1.4% from last year. March-May farrowings were estimated to be down 1.6% lower than a year ago, in line with pre-report estimates. The ratio of farrowings for the Mar-May period vs. the March 1 breeding herd inventory was 49.3% compared to the average of 49.5% in the last few years.
Future Supply Implications
Producers responding to survey suggested that they expect to farrow 4.4% fewer hogs than the previous year during the Jun-Aug quarter and 4.9% fewer than in 2019. This is higher than analyst estimates, which pegged farrowings for that quarter 3.1% lower y/y.
We think the breeding herd size suggests higher farrowings than what producer survey says. The ratio of Jun-Aug farrowings vs. the June 1 breeding herd was 50% compared to an average of 51.3% in the last two years and 51% in the last five years.
Still, even with higher farrowings than currently suggested in the producer survey, we still expect slaughter for the Dec-Feb period to be down about 3-3.5% compared to what it was the previous year.
Weekly Pork Price Summary
USDA prices for pork sub-primals, including butt, loin, ham, picnic, belly, trim, and spareribs.