Pork Prices Ease Lower as Supplies Seasonally Increase

Pork Prices Trending Seasonally Lower as Supply Improves.

Hog and pork cutout futures have been quite volatile in the last two weeks as market participants have reacted to both cash market developments and the potential impact on demand from the new COVID variant. Before the new variant had been announced, funds had taken a more bullish stance. For the week ending November 23, managed money funds increased their long position by 6,107 contracts and reduced their short position by 3,096 contracts. This brought the net long position of managed money funds to 52,366 contracts, a net long increase of over 9,200 contracts. It was quite inconvenient that just a day later news of the more infectious COVID variant started to make the rounds. Following that, we saw funds add to both their long and short position, resulting in only a small net change but likely driving the day to day volatility in the futures market.

Cash hog values appear to have found a bottom, with the latest cash hog prices trading around $61/cwt, about $5/cwt higher than the previous week. IA/MN cash hog prices were last quoted at $64/cwt, about $8/cwt higher than the previous week.  Packers ran a full production schedule last week, with slaughter reaching 2.667 million heads and the pace of slaughter in the next two weeks will be key.  Producers fell behind in marketings during October and November, which contributed to the weaker cash market during that time.  Weights of producer-owned hogs are still running above 2020 and 2019 levels.  The trend in weights in the next two weeks will be telling and impact cash market values in January.  We think a big part of the reason for the recent widening spread between cutout futures and hogs was due to producers losing currentness and thus leverage (see chart).  But if the USDA September survey was right, pipeline supplies will likely ease and allow producers to catch up.  This would suggest the spread returns to under $10/cwt, which is the level we have seen in previous years as well.  Implied hog slaughter for Jan/Feb is expected to decline to 2.5 million hogs. 

            A big unknown for early 2022 is the impact that the rollout of Prop 12 in California.  It is thought that packers have prepared for this, in part by reducing the number of sows in group housing operations to meet requirements.  However, this is still extremely disruptive, forcing more inefficiencies in the system.  We will not really know the impact until the rubber hits the road.   Exports also remain a major wild card. The latest export data reported last Thursday painted a generally positive picture, with strong shipments to Mexico and even China coming in putting new orders on the books. In the past February, and especially April futures, have been vulnerable to export demand. That is because production tends to still be relatively strong while retail demand is somewhat soft. Easter tends to support the ham market in Feb/Mar but robust export demand is needed once buying for Easter needs comes to an end. Freezer inventories at the end of October were 22% lower than the five-year average, with the inventory of bellies down 60% and the inventory of ribs 30% lower. With memories of 2021 spring and summer fresh, processors and retail buyers will likely be more proactive in building their positions as just in time inventory models have shown their limitation. We currently expect the pork cutout in late Jan/early Feb to be $10-$15/cwt higher than where it closed on Friday.

Cold Storage Update

The latest cold storage data remains supportive for meat protein prices as supply in the freezer remains well below year ago and five-year average levels. The total inventory of beef, pork, chicken and turkey at the end of October was estimated at 1.977 billion pounds, 11.6% lower than the previous year and 16.8% lower than the five-year average.  October inventory was down 4% from the previous month, in line with the five-year average inventory drawdown.

At the end of October the inventory of all pork in cold storage was estimated at 439.6 million pounds, 1.7% lower than a year ago but still as much as 22% lower than the five-year average. October pork freezer inventory declined 6.4% from September levels compared to an average 3% decline in the last five years. What’s even more impressive is that inventories declined to this degree despite already low inventory levels. High prices for a number of items limited the amount of product going to the freezer. The decline in pork belly inventories has been the best example of this. Belly inventories at the end of October were 11.6 million pounds, a 10% decline from the previous month and almost 60% lower than the five-year average. High pork belly prices in October caused end users to continue to draw inventories down. Recently belly prices have declined sharply but the drop may be short-lived considering the extremely low inventory levels and need to hedge supply/price for next spring. Ham inventories normally decline in October as processors ramp up production ahead of holidays. Ham inventories at the end of October were 150.8 million pounds, 22.3% higher than a year ago but still 12% lower than the five-year average. Ham inventories declined 22.5% from the previous month compared to an average 18% decline in the last five years. Inventory of ribs in the freezer remains limited at just 65.6 million pounds, 8.5% below last year and 30% lower than the five-year average.

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