Tight hog supply in parts of the country lifts prices
May 10, 2021
Profit Maximizer Report
Steiner and Company produces the National Pork Board Newsletter based on information we believe is accurate and reliable. However neither NPB nor Steiner and Company warrants or guarantees the accuracy of or accepts any liability for the data, opinions or recommendations expressed.
Hog producers remain current, pressuring hog values higher as packers compete to run full shifts.
• Packers continue to face a very tight hog market, with cash hog prices in some parts of the country as high as $125/cwt. Negative margins will force some packers to reduce slaughter, especially once they have filled orders for Memorial Day.
• Slaughter last week dropped to 2.4 million head and we think it will be lower again in the next two weeks. The reduction should continue to bolster prices for processing items, with hams, bellies and pork trim more vulnerable to price inflation this summer.
• Corn prices are now at the highest price since 2012 and the increase will negatively impact hog production decisions for next spring.
• Belly prices retreated recently but expectations are for prices to climb above $200/cwt in June and July. Mexico demand continues to underpin ham values.
Hog supplies in the cash market remain extremely tight and this is reflected in the prices paid in the open market
The average national negotiated carcass price (LM_HG200) on Friday was $113.87/cwt, lower than the previous day but still as much as 2% higher than the previous week and 13.5% higher than a month ago.
It should not be a surprise that hog supplies are tight going into the summer. It has happened just about every year going back decades.
Last year was an aberration, with hog supplies (and slaughter) increasing in June and July. COVID related plant closures resulted in hogs getting backed up and then processed when plants came back online.
Indeed, one could argue that hog supplies coming to market in the last few weeks are a bit higher than one would have expected based on the USDA survey.
Slaughter last week was 2.4 million head, down almost 50k head lower than the previous week. Hog slaughter in the last four weeks has averaged 3.8% higher than the comparable four-week period in 2019 (we leave 2020 comparisons out due to COVID skewing the data).
Looking at the inventory survey from March, the supply of hogs in the 120-179 pound category was 2% lower than in 2019. Is the survey that far off? Maybe and maybe not.
Probably a better way to look at things is to compare the inventory of the two market hog categories: +180lb. and 120-179. The March survey had the number of hogs in these two groups at 28.151 million, +1.4% vs. 2019.
Weekly hog slaughter since the first week of March has been a total of 24.910 million, 2.5% higher than last year. So, while the supply is a bit higher, it is not that far off.
One could argue that strong pork demand is causing packers to pull some supply forward to fill orders from retail and food service customers. While this may have caused some margin erosion, in the short term the packer is looking to keep customers happy.
After all, it was not that long ago when packers would recognize that negative margins in Q2 were par for the course, offset by better margins in Q3 and Q4.
One indication that we may be seeing some hogs being pulled forward is the decline in hog carcass weights. According to our calculations, carcass weight of producer owned hogs are down 2 pounds or 0.9% in the last month and they are also 1.5 pounds lower than the same period in 2019.
Another issue that needs to be addressed has to do with regional hog prices
Hog supplies are extremely tight in the Midwest, evidenced by the widening spread between the national hog carcass price and the average price of IA/MN hogs.
To remove some of the noise we have calculated a five-day moving average. For May 7, the average price of IA/MN hogs on a negotiated carcass basis was $121.3/cwt, up $4.75/cwt higher than the national average.
USDA did not report hog prices for the Eastern Cornbelt due to confidentiality issues but prices there are far lower.
While this may not be of significant concern to market participants that focus on pork prices (e.g. meat buyers) it is especially important to hog producers, especially those that use the national price as base in their formula calculations.
We think recognizing the spread of local prices to the national price is always important, but especially now.
Record March pork exports despite a decline in exports to China
We thought March pork exports would not match the levels we saw a year ago but strong exports to smaller markets in Asia tipped the scale.
March US exports of fresh/frozen and cooked pork were 247,664 MT, 1.7% higher than a year ago and a new record monthly volume.
Last year the big jump in exports was driven by exports to one key market – China. China remains the top market for US pork, taking 59,168 MT of pork. However, this volume was 10,368 MT or 15% lower than a year ago.
The reduction in exports to China was more than offset by higher exports to Mexico, Japan and especially the Philippines.
African swine fever has significantly impacted domestic supplies in the Philippines and in April the Philippine government announced it would reduce the tariff of in-quota pork from 30% to 5% during Q2 and then 10% after that.
Pork entering above the 404,210 MT quota would face a 15% tariff vs. 40% previously. In March, US pork export shipments to the Philippines were 11,736 MT, 9,741 MT higher than a year ago and offsetting much of the reduction in exports to China.
April shipments to the Philippines are on track to be around 10,000 MT again but escalating pork prices may limit export volumes.
We think that overall US pork export shipments in April will hit another record high thanks to big export shipments to Mexico, China, and several smaller markets.