Record Prices for Grilling Items as Supply Growth Remains Limited

Robust demand and continued tight spot supply continues to drive price inflation, especially for grilling items

The cyber-attack on JBS, the largest meat processing company in the world, reduced supply availability during an already holiday shortened week. With 2.5 lost production days, hog slaughter last week dropped under 2 million head, about 400k head lower than the previous week.

Retailers and processors had reduced their inventory the previous week to limit shelf-life issues during the long holiday weekend and suddenly found they could not replenish inventory as quickly as they expected.

The shortfall in supply clearly had an impact on spot supplies, with the number of pork loads trading in the spot (negotiated) market down 15% from the previous week. With two important feature weekends ahead (Father’s Day and 4th of July) the market was already tight, and the disruption further impacted spot pricing.

Different from cattle, where packers are unlikely to make up the shortfall because they are already running at near capacity, pork packers have more capacity available. Weekly slaughter in May averaged around 2.4 million head/week compared to 2.55 million in March and near 2.7 million in Jan/Feb.

The main challenge for packers in recent weeks was getting market ready hogs not finding slaughter capacity. Last week’s disruption appears to have caused some hogs to get backed up, reflected in the increase in the average weight of barrows and gilts.

We think hog slaughter next week has the potential to be over 2.5 million head, helping ease some of the product shortages. But the situation in the pork market remains very uncertain and until/unless we see supply start to close the gap with demand, we have opted to be quite conservative (i.e., high) with our forecasts for the summer months.

Futures market participants are clearly leaning in that direction as well, with the pork cutout for June at $132/cwt and July at $130/cwt. Such futures prices imply significant premiums for items such as bellies and hams but also ribs, butts and loins. High prices for competing meats, the improvement in demand post COVID, and the seasonal tendency for pork supplies to be lower in late June and July will continue to underpin pork prices in the near term.

Hog breeding herd liquidation has not come to a stop despite sharp increase in pork prices

High feed costs remain a major source of concern for hog producers. Sow slaughter may have slowed down in the last few weeks, but it remains above 2019 levels. The level of breeding stock liquidation is more significant than the numbers show because the lower inventory implies a higher culling rate.

Sow and boar slaughter in March and April was 632,500 head, 62k head or 10.8% higher than in 2019. We think May sow and boar slaughter may have been around 272k head, 14k head less than in 2019.

For the quarter, however, slaughter is still up about 48k head and the ratio of slaughter to March 1 breeding herd inventory was 14.5%, almost a full percentage point higher than the same quarter in 2019. The last time ratio of sow/boar slaughter to breeding inventory was this high was in the spring and summer of last year.

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