Pork Supplies Will Be Smaller Than Expected This Winter
September 27, 2021
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• USDA quarterly inventory report suggests that pork supplies this winter will be much tighter than previously expected. According to the report, the pig crop during Jun-Aug was 6% lower than the previous year. This implies a similar reduction in slaughter during the Dec-Feb period.
• Hog prices have been drifting lower in the last two weeks but pork cutout prices continue to be well supported by robust domestic and export demand.
• The supply of pork in cold storage at the end of August was 19% lower than the five year average. Pork demand is higher in Q4 and limited freezer stocks combined with lower than expected growth in supply should keep pork prices well above year ago levels.
• Pork belly prices have improved in the last two weeks, following the same path as a year ago. Prices for bone-in ham remain soft as packers struggle to find enough people to fully staff ham boning and trimming lines.
Pork Demand in Q2 Far Outperformed Previous Years and It Appears Q3 Demand Has Been Just As Strong
The latest USDA Hogs and Pigs report can be safely construed as bullish, with several categories well outside expectations.
Coming into the report, analysts were expecting the total inventory of market hogs as of September 1 to be 1.7% lower than a year ago. USDA reported the inventory of all hogs at 75.352 million head, 3.082 million head, or 3.9% lower than a year ago.
The 1.75 million head difference between the survey and pre-report estimates implies a significant re-assessment of supply available during the fall and winter. The inventory of market hogs was estimated to be 69.162 million head, down 2.9 million from a year ago.
Much Of The Y/Y Reduction Was Inventory of Hogs Under 120 Pounds, Which Are Expected To Come To Market This Winter
The USDA survey pegged the inventory of hogs weighing over 180 pounds at 12.899 million head, 170,000 head or 1.3% lower than a year ago. On average analysts polled ahead of the report indicated that the supply of hogs in this category was going to be 2% lower than a year ago.
We think the survey is overestimating the inventory of heavy hogs given the pace of slaughter in recent weeks. The survey results will likely have little impact on October futures. Rather, we think the trend in the cutout is more of a factor for the nearby contract.
USDA pegged the inventory of hogs between 120 and 179 pounds at 14.656 million head, down 211,000 head or 1.4% from a year ago. These are hogs that will likely show up between mid-October and mid to late November.
Last year, weekly hog slaughter during this period averaged 2.69 million head. The USDA survey would imply an average weekly slaughter of around 2.65 million head, a robust supply number that should result in adequate pork supplies going into the year-end holidays.
The biggest surprises in the report concerned the inventory of hogs under 120 pounds. Hogs weighing between 50 and 119 pounds were down 1.27 million head or 6% compared to a year ago. This suggests a substantial decline in slaughter for late November, December and through mid-January.
The inventory of pigs under 50 pounds was 21.855 million head, down 1.289 million head or 5.6% lower than the previous year.
Revisions to Inventory Estimates and Pig Crop
In addition to providing a very bullish estimate for supplies later this year, USDA also made some significant revisions to inventory estimates and the pig crop reported previously.
USDA lowered the pig crop for the Dec-Feb period by 1.292 million head or 3.9%, one of the biggest revisions on record. The reduction reflects the lower-than-expected slaughter during the Jun-Aug quarter.
USDA did not make any adjustments to the Mar-May period but that may happen in December once the slaughter numbers for the Sep-Nov quarter are collected. We think slaughter this quarter will be smaller than the survey suggests, which will probably result in more downward revisions.
The other bullish number in the report concerned the size of the breeding herd. The USDA survey pegged the September 1 breeding herd at 6.190 million head or 2.3% lower than a year ago. This is about 70,000 head lower than analysts were expecting and 0.6% lower than the June quarter.
Normally September breeding herd is higher than June. This is the first time since 2013 (coincidentally another high feed cost year) where the September inventory has been lower than June. We view the smaller breeding herd as bullish for next spring and summer.
Coming into the report, we thought analyst estimates for only a 1.1% decline in the breeding herd were too optimistic. High feed costs, uncertainty about China demand, and upcoming changes in California marketing rules, presented producers with a lot of risk. Gilt retention was low, and when combined with a relatively high sow slaughter, it resulted in a notable reduction in the breeding herd.
According to the USDA survey, the Jun-Aug pig crop is estimated at 33.9 million head, 6% lower than a year ago and 6.8% lower than in 2019.
Prior to the report, analysts on average expected the Jun-Aug pig crop to be 3.4% lower than a year ago. The lower pig crop is a result of a 6.6% reduction in Jun-Aug farrowings.
Lower Farrowing Ratio Highlights Negative Impact of PRRS on Pig Supplies
The ratio of Jun-Aug farrowings vs. the June 1 breeding herd was 49% compared to an average ratio of 51% in the last five years. The lower ratio highlights the negative impact that PRRS has had on pig supplies. Indeed, after revising lower the farrowings (and thus pig crop) for the Dec-Feb quarter, the farrowing ratio dropped to 46.6%.
USDA survey suggests that these issues have persisted at least through the summer and producer responses suggest that they may be affecting fall supplies. Farrowing intentions for the Sep-Nov quarter are projected down 4.2% from the previous year and 6.2% lower than in 2019.
The ratio of Sep-Nov farrowings vs. the Sep 1 breeding herd is 48.5% compared to an average of 50.2% in the last five years. Dec-Feb farrowings are projected to increase 1.4% compared to the previous year, but that is largely due to the sharp decline in farrowings and the farrowing ratio last year.
Despite the modest increase, the farrowing numbers point to limited hog supplies next summer. As for next fall, much will depend on the decisions that producers make with regard to the breeding herd during the next few months but a quick turnaround does not appear likely.
Weekly Pork Price Summary
USDA prices for pork sub-primals, including butt, loin, ham, picnic, belly, trim, and spareribs.