Livestock and Grain Futures Decline but Supply Issues Persist

September 13, 2021

Profit Maximizer Report

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Highlights

• Hog futures were sharply lower at the end of the week on concern about a slowdown in pork exports at a time when supplies seasonally increase.

• Pork trim prices have started to correct lower but they remain well above year ago levels. The price of 42CL pork trim has been cut roughly in half in the last four weeks and yet prices are double the five-year average.

• Ham prices remain volatile, largely reflecting export demand and rising production. Bone-in ham prices have pulled back as slaughter increased in late August and is expected to be higher in the fall. Boneless ham prices, however, remain very firm as packers struggle to run ham boning/trim lines.

• Loin prices continue to be supported by the high price of beef/chicken. However, prices should ease lower as supply seasonally improves.

Download Detailed Price Summary and 6-Month Forecasts

Livestock and Grain Futures Decline As Supply Availability In the Domestic Market Now Expected To Be Higher Than Earlier Feared

The mood in the livestock and meat complex turned bearish by the end of last week, in part because of rising COVID cases and prospects of slower economic growth. Even Goldman Sachs has been quite bullish since the US economy cut back its growth estimates for 2021 due to prospects of slower growth in the second half.

Inflation fears caused an influx of money into commodities during the summer, but more recently funds and other speculators have adopted a more risk-averse attitude. Fed cattle futures for December are now priced at around $128/cwt, down almost 1,000 points or 6.4% compared to the contract high in mid-August. Similarly, December lean hog futures are now down by near 1,300 points or 14% and corn futures for the same contract month are down by more than 19%.

Despite the recent bout bearishness in the futures complex, pork prices are expected to remain high (from a historical perspective) for the remainder of this year.

Limited supply availability, tight labor situation and high transportation costs are key factors that drive our (still high) price projections for Q4.

The chart above summarizes our ideas about per capita supply availability by quarter for the rest of this year and in 2022. Domestic supply availability is calculated as: starting inventory + production + imports – exports – ending inventory.

Pork supply availability normally increases in Q4 compared to Q2 and Q3 and we expect to see the same again this year. Compared to Q2 domestic per capita, availability in Q4 is expected to be 13% higher but pork demand is also higher in Q4.

Compared to a year ago, domestic per capita availability is still expected to be about 6% lower than in 2020 and down by a similar amount vs. 2019. This is after we made some downward revisions to our export forecasts.

We now think US pork exports will be only 1% higher than last year, as higher exports to Mexico, South America and the Caribbean are offset by lower shipments to China.

US pork imports are expected to be lower in the second half of this year due to less pork coming from EU and Canada. The decline in per capita pork availability is expected to keep US pork prices above 2020 and 2019 levels, something reflected in our forecasts.

Two big uncertainties in our forecast:

The level of pork exports in Q4, especially with the Chinese New Year around the corner.
Domestic demand that has been exceptional so far.

We think low Chinese domestic prices and lower prices from competitors will limit the amount of US pork going to China for the remainder of this year. Domestic demand, on the other hand, is expected to remain strong due to high prices for competing proteins and the improvement of the US economy (vs. year ago).

Pork Exports in July Were Lower

High prices and slowing demand from China negatively impacted the volume of US pork exported in July.

According to USDA-ERS, US exports of fresh/frozen and processed pork were 508.2 million pounds (carcass wt.), 50 million pounds or 8.5% less than last year and 33.1 million pounds or 6.1% lower than in July 2019.

China was a major factor behind US export demand in the last couple of years. However, Chinese domestic pork prices are now 60% lower than a year ago. Also, US hog prices now trade at a premium to the EU, and Chinese buyers also have to contend with higher tariffs for US product.

Total US pork exports to China in July were 96.6 million pounds or 62% lower than a year ago and 48.4 million pounds or 45% lower than in 2019.

Exports to Mexico helped offset some of the decline in Chinese demand. Shipments to Mexico in July were 154.9 million pounds, 19.8% higher than last year but only 2.8% higher than in 2019.

Higher exports to S. Korea, Colombia, and the Caribbean also helped offset some of the Chinese decline. US pork exports in July accounted for 24.8% of production, down from as high as 33% back in May.

Even with lower exports, domestic supply availability was significantly constrained this past July. Trade adjusted output in July (production + imports – exports) was 1.631 billion pounds, 13.7% less than last year and 6.7% less than in 2019. As with beef, the lack of supply just as demand rebounded resulted in significant price appreciation.