Tighter Supply and Weather Disruptions Impact Wholesale Pork Prices
February 22, 2021
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Weather disruptions cause shortfall in supply, higher prices for a number of items.
• Hog slaughter down almost 7% compared to a year ago and now below year ago levels for the last four weeks.
• Pork supply no longer benefiting from heavier carcass weights. Average weight of producer owned barrows and gilts is now below year ago levels.
• Processing items continue to underpin wholesale market. Processors are in the midst of filling Easter ham orders and current disruptions and robust exports have limited the supply of product available in the spot market.
• Spot market pork loads are now down as much as 7% from a year ago.
• USDA early forecasts for 2021/22 indicate an increase in corn planted acres. However, corn prices unlikely to return to sub $4 levels given dry conditions and strong export demand.
Sharp Decline in Hog Slaughter
Extreme cold temperatures across much of Central US and disruptions to transportation and energy networks resulted in a sharp decline in hog slaughter last week.
According to USDA, total hog slaughter for the week was estimated at 2.432 million head, down some 222,000 head from the previous week and 179,000 head or 6.9% lower than the same week a year ago.
As the table below shows, slaughter has been close to or below year ago levels in three of the last four weeks even as expectations, based on the December ‘Hogs and Pigs’ report were for slaughter to be higher than the previous year.
Packers have struggled to find market ready hogs in the last three weeks. Producer hog supply has become increasingly current and cash hog values have continued to trend higher.
The disruptions in slaughter last week were not an anomaly. Weather issues in previous weeks have created short term disruptions in the flow of pork products to retailers and processors.
Packers have prioritized filling formula orders during the week, which has limited the amount of product available in the spot market.
This helps explain why spot prices were up even as overall pork production in the last four weeks has averaged above last year.
But first things first, let’s look at the USDA calculation of slaughter and pork production before we review spot trades.
We think the pork production number that USDA has published in the last four weeks has been too high. USDA-AMS continues to rely on the weekly average trend to calculate weights and thus pork production.
For the week ending February 13 USDA-AMS estimated the average hog carcass weight at 220 pounds per carcass, 2.33% higher than the previous year and average weight for week ending February 20 was estimated at 219 pounds.
And yet, for the week ending February 6, USDA-NASS actual average weight was 219 pounds and since then weights have continued to drop.
We think actual weights are probably 217 pounds, just 0.8% higher than last year. If we assume weights that are at least 1% lower than what USDA has published (a reasonable assumption we think), the total pork production in the last four weeks has been slightly under last year, mostly because of the sharp decline last week.
The amount of pork traded in the spot market has declined even more than the decline in production, suggesting that product is currently going to fill formula orders or export.
Pork demand has been robust at the start of the year, helping bolster prices to unexpected levels. The amount of pork cuts traded in the spot market in the last four weeks was a total of 5,492 loads, down 433 loads or 7.3% compared to the previous year.
While the volume was lower last week (-6.6%), it has been consistently lower in each of the last four weeks. Weekly volume of pork cuts trading in the spot market in the last four weeks has been an average of 9.6% compared to 10.4% last year and 10.8% for the five year average.
Bottom line: Robust demand and supply disruptions have caused prices to hold up at much higher price points than earlier expected.
Higher feed costs, reductions in the breeding stock and disease pressures (PEDv, PRRs) have also limited piglet production this winter. This has the potential to continue to limit pork supplies in the short to medium term.
Grain markets continue to maintain premiums and USDA forecasts for 2021/22 suggest only a modest increase in grain supply.
Early USDA projections for the 2021/22 marketing year suggest that that farmers will plant 92 million acres with corn this spring, up 1.2 million acres from the previous year and the highest corn plantings since 2016-17 marketing year.
The trend yield used in the balance sheet at 179.5 bu./acre is a bit under what analysts were expecting but in line with the below trend yields of the last two years. This is always a key input but this year even more so due to tighter pipeline supplies.
Drought conditions in the Western Corn belt and the ‘no margin for error’ situation may continue to be viewed as supportive.
December 2021 corn futures are currently 21% higher than in November.
The above assumptions lead USDA to project corn production at 15.150 billion bushels, almost 1 billion bushels higher than the previous year. But carryover stocks are expected to be lower and USDA is already projecting feed demand to rebound.
Livestock and poultry production was disrupted in 2020. As situation in the livestock and poultry processing sector has normalized, USDA is forecasting feed and residual to be 5.850 billion bushels vs. 5.903 billion bushels in 2019-20.
Corn exports jumped in 2020/21 and USDA has increased corn demand by another 50 million bushels. Is that enough?
Those that hold a bullish view of the market do not think so, looking at lower production potential in the Black Sea region and especially the supply hole that appears to have developed in China.
Interesting to note that the UN Food and Agriculture Organization now pegs Chinese corn stocks at 139 million tonnes, lowering them by 54 million.
USDA clearly has a very different opinion, pegging China ending stocks for 2020/21 at 196 million. With such wide perceptions of the supply situation in China, market participants will likely continue to focus on a) new sales to that country and b) the progress on shipments of product that has already been booked.
We thought you might find the corn futures chart of interest, showing the relationship of corn stocks to price.
At this time USDA expects 2021-22 stocks to be about the same as in 2020-21 but with supply risks skewed to the downside and expectations for better demand, it is understandable why futures are currently opting to hold a premium out front.