Pork Demand in Q3 Remains Far Above Historical Levels

Pork Demand in Q2 Far Outperformed Previous Years and It Appears Q3 Demand Has Been Just As Strong

Pork prices have been far higher than what normal demand would suggest. While pork demand has improved in recent years (2019 and 2020 are above the demand line), prices this year have been about 52% higher than what the long-run demand would have implied.

Our expectation is for demand to remain at elevated levels through the end of the year but then start to return to somewhat more normal levels. In our view, the pork market has more downside risk than beef currently.

Export demand from China has slowed down considerably as prices there are now back to pre-ASF levels. A recent USDA report suggested that Chinese pork production may decline as much as 14% in 2022, and Chinese pork imports are expected to increase.

However, the reason for assuming lower Chinese production is due to oversupply. It is far from certain that Chinese producers, who have invested significantly in rebuilding, will cut back.

African swine fever (ASF) in the Dominican Republic is another major risk for U.S. producers. USDA is working to designate Puerto Rico and the U.S. Virgin Islands as ASF protection zones. If the World Animal Health Organization (OIE) recognizes this designation, it might prevent other countries from banning all U.S. pork exports. But it is still not a guarantee, especially as countries have a vested interest in a temporary suspension of U.S. exports.

Tight Cold Storage Supplies Will Continue To Impact Pricing Into The Fall

While it is not a surprise that pork inventories did not change much last month, the current supply underscores how tight freezer supplies remain and the need to continue to rely on spot market to fill needs.

At the end of July, the inventory of all pork in cold storage was estimated at 443.1 million pounds, 3.8% lower than a year ago and 20.2% lower than the five-year average. In the last five years, the average drawdown of pork inventories in July was 0.3% and this year inventories were just 0.3% higher.

There is some hope/expectation that an increase in pork production in the fall will start to put some pressure on prices. However, the lower inventory levels will help absorb some of the increase in production.

Ham processors and other market participants were able to increase ham freezer stocks in July and combined with the increase in production this should help cap ham price inflation this fall.

Inventory of all hams in the freezer at the end of July was 152.6 million pounds, 11.7% higher than last year but still 12.3% lower than the five-year average. In the last five years, ham inventories in July increased by 11% from the previous month. This year the inventory build was 17% higher.

On the other hand, belly inventories remain limited. They normally decline in July, and that happened again this year. The total inventory of bellies in the freezer at the end of July was 34.5% lower than a year ago and 31% lower than the five-year average.

The drawdown in July was 24% compared to a 19% average decline in the last five years. We saw a big spike in bellies in August, and one could argue that this was due to end-users depleting inventories early in anticipation of lower prices and then being forced to get additional production the spot market in August to cover their shorts.

Inventory of other pork products was also down. Inventory of pork loins declined 8% from the previous month, suggesting good demand at retail as high prices for other proteins shifted some of the consumer focus to pork.

The total supply of beef, pork, chicken, and turkey in cold storage at the end of July was 2.015 billion pounds, 12.4% lower than a year ago and 16.6% lower than the five-year average. Limited protein inventories and continued production bottlenecks may continue to impact pricing through the end of the year.

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