Robust Demand, Fear of Lower Hog Numbers Driving Prices

Robust Pork Demand and Talk of Disease Shortened Supply and Tight Hog Inventories Continue to Bolster Future/Forward Price Outlook for Pork

Hog futures posted strong gains last week and it is expected to start the week on a firm footing. While talk of California delaying implementation of its Proposition 12 rule clearly helped bolster the market, robust pork cutout values and a surprising rally in cash hog values also added to the upside momentum. The delay of Prop 12 in California follows a decision from the Superior Court for Sacramento County to delay implementation until 180 days after the California Department of Food and Agriculture’s final regulations go into effect. This could help further support fresh pork demand during spring and summer when demand is seasonally higher.

Cash hog prices, defined as hogs trading on a negotiated basis, have been volatile in the last two weeks as rising COVID cases at processing plants resulted in higher rates of worker absenteeism. Slaughter for the week ending January 15 was 2.366 million head, 10.5% lower than the previous year and slaughter for the week ending January 22 was 2.440 million head, 10.2% lower than last year. Last week slaughter rebounded above 2.5 million head but still as much as 5.5% lower than a year ago.  Cash hog prices during this period ranged between $60-$70/cwt. The previous Friday (1/21), USDA quoted the national negotiated hog price at $60.91 (based on the LM_HG200 report) but at the end of last week prices had jumped to $75/31. The $14 move in just five days drove futures all last week, adding to the positive tone from the general improvement in the cutout.  What’s especially impressive is that cash hog values have rallied even as the weight of producer owned hogs is now higher than what used to be “normal” levels for this time of year. Compared to 2020 the average weight is up 2.6 pounds or 1.2% and it is up 3.8 pounds or 1.8% compared to 2019.

One item that we have mentioned previously in this report is the need for loins to carry a bigger share of the cutout. That seems to be taking place although there is still a very wide spread between the value of bone-in and boneless loins. The pork loin primal value on Friday was estimated at a little over $101/cwt, $26/cwt higher than where it started the year.  The improvement in the value of the loin primal has added about $6.5/cwt to the value of the pork cutout. Since the start of the year, the pork cutout has gained about $10/cwt (using Friday’s close), with the loin primal clearly one of the key contributors to that gain. Higher belly prices have added about $4.2/cwt to the value of the cutout but that has been offset by lower prices for picnics, butts and ribs.  Retail loin demand tends to be inelastic in the near term, especially so given the sharp gains in the value of chicken breasts and ground beef. As hog slaughter improves we should see gains in the loin primal slow down, but they should remain well above year ago levels. Last April the loin primal barely touched $100/cwt and the question is whether the current y/y premium is sustained during what usually is a low demand time of the year.

One additional factor that could also impact hog supplies is the recent requirement by Canada and the US that truck drivers crossing the border need to be vaccinated. We think in 2021 US imported about 6.7 million hogs (market hogs and feeder pigs) vs. an annual slaughter of 126.6 million. While the impact may not be somewhat limited overall, it could impact regional markets, especially feeder supply at a time when pig crop is down due to a smaller breeding herd and higher disease related losses.

Tight Cold Storage Inventories for Several Pork Items Remain Supportive of Prices Going into Spring, Especially with Lower Hog Numbers in the Pipeline

Pork supplies in the freezer remain extremely tight and combined with lower slaughter to start the year this has helped support pork cutout values. The inventory of all pork items in cold storage at the end of December was 493.9 million pounds, 4.1% lower than a year ago and 19.1% lower than the five year average. December inventory declined 0.8% from the previous month compared to an average drawdown of 2.2% in the last five years. Ham inventories normally decline in December and that was the case this year. At the end of December ham inventory was estimated at 63.8 million pounds, 18.9% higher than last year but 12% below the five year average. Ham inventories declined 16.9% from the previous month compared to an average drawdown of 25% in the last five years. This was not a particularly positive number for hams but overall freezer stocks remain limited. Processors and packers likely used the price decline in December to bolster inventories. At the end of December the inventory of bellies in storage was 39.5 million pounds, 28.6% higher than a year ago and now back at the same level as the five year average.  Seasonally we see belly inventories continue to increase in Q1 as processors prepare for spring/summer demand. It remains to be seen if that continued in January given the recent runup in belly prices. Inventory of pork loins in the freezer at the end of December was 39 million pounds, 5.7% lower than a year ago and 7.4% lower than the five year average.

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