Robust demand, tight supplies drive pork price inflation
April 10, 2021
Profit Maximizer Report
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Hog supplies remain tight, and packers continued to pay up last week to run full slaughter schedules.
• Pork demand remains very strong and by the end of the week the pork cutout closed at $113/cwt, 41% higher than two months ago.
• Pork belly prices are now 67% higher than two months ago as processors struggle to fill retail and foodservice orders. Limited freezer stocks have pushed more processors to try and buy in the spot market causing a sharp spike in prices.
• Other processing items, especially pork trim, remains high priced. Lower carcass weights, the decline in slaughter and robust exports have all contributed to limit the supply. Reopening of foodservice establishments, stadiums and seasonal retail demand has contributed to price inflation.
• Pork exports to Mexico remain very strong and last week sales jumped to over 23,000 MT, supporting ham prices.
Tight hog supplies and booming demand continue to underpin pork prices
Processing items are at the highest level since 2014 and, in some cases, at new record highs. Cash hog prices continued to trade very firm last week, reflecting both the tight supply situation on the ground and the reality of better demand in domestic and export channels.
Negotiated cash hog prices have been leading all other pricing methods, which is a reverse mirror image of what we saw last summer and fall. The weighted average negotiated price for the week was estimated at $98.5/cwt, 3% higher than the previous week.
Prices for hogs that are sold using various pricing arrangements were mixed, with swine or pork market formula hogs also higher for the week. As a side note, the calculations in the table below are done using daily prices and head sold and reported as a weighted average rather than a straight average. The latest data available is for Thursday so we used the same price for Friday to do an estimate for the week.
COVID disruptions make comparisons to last year a bit iffy but even compared to 2019 negotiated prices are up 26%. Market participants continue to note that cash hog supply is tight.
Still, we think that this remains a demand led market. Evidence of that is that hog slaughter is above 2019 levels and yet cash prices are up well in the double digits.
One interesting takeaway from the price table is that the largest share of hogs is currently priced using the best pricing method currently: swine or pork market formula.
That is because this marketing arrangement includes hogs that are priced off the negotiated market, which is currently performing very well as well as hogs that are priced off the cutout, which is also performing very well. More than half of hogs sold last week were priced over $100/cwt.
Higher prices for processing items have bolstered the value of the pork cutout, which on Friday closed at $113.2/cwt, $33/cwt or 41% higher than where prices were in early February.
Of that $33 increase in the cutout, $13 came from higher belly prices alone. The belly primal value on Friday was $206.17/cwt, 67% higher than two months ago.
It is not unusual for processing items to carry the cutout in the first three months of the year.
Fresh pork demand is ho-hum during this period, but processing items tend to benefit from holiday demand (Easter hams) and processors building inventories for the summer.
With spring weather around the corner (already here for many) fresh pork demand should continue to improve as well. Loin, butt and picnic prices have started to increase as well.
The value of the loin primal on Friday was $97.3/cwt, 24% higher than in early February, while the value of the butt primal was $112.2/cwt, 58% higher than two months ago.
While packers have paid up consistently in the cash market in recent weeks, higher wholesale pork prices and higher by-product value have helped them keep margins in line.
This should continue to incentivize them to maintain full slaughter schedules. The main challenge for them will be getting adequate hog supplies.
Hog slaughter last week was estimated at 2.487 million head. The reduction in part was due to a low slaughter in the Monday following Easter.
In the four weeks ending April 10, hog slaughter has been a total of 10.028 million head, 141k head higher than the same period in 2019. Average weights during this period have been steady, suggesting that producers remain current.
Weather remains a key variable for June and July. Hot temperatures early could significantly exacerbate the shortage of trim. Strong exports are also affecting trim markets as product is shipped as untrimmed product.
Finally, there is a lot of concern about hog supplies this summer due to the toll that PRRS appears to have taken on the Dec-Feb pig crop. We discussed this issue at length in our report two weeks ago.
However, this has been a hot topic of discussion as new information suggests that the new PRRS variant is much more infectious and has a higher mortality rate. More on this topic here.
Pork export update for February
US pork export shipments were lower in February, largely because we are comparing to the extremely high levels established a year ago. Production disruptions likely played a minor role.
More negative, in our view, are the delays in exporting product out of the year, which continue to affect all proteins.
Total US exports of fresh/frozen and cooked pork were 203,525 MT, 11.7% lower than a year ago but still as much as 34% higher than in February 2019.
China remains the top market for US pork but shipments to 49,046 MT this year, a 32% decline. Exports to China will likely show an increase in March but they are again expected to be lower than a year ago.
We currently think March exports to China will be around 55,000 MT, 21% lower than a year ago. Exports to Mexico were 47,556 MT, 7.3% lower than last year but now approaching the export volume going to China.
Last week, USDA reported net sales to Mexico over 23,000 MT, setting the stage for continued strong export shipments in April and early May.