Prices Rebound On Prop 12 Timing Speculation, Seasonal Factors

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No Significant Y/Y Change In Pork Supplies Through The End Of The Year. Uncertain Supply Outlook For 2024.

The results of the ‘Hogs and Pigs’ inventory survey are discussed below but the key takeaway in our view is that pork supply growth remains limited in the near term, and we do not see a scenario resulting in supply growth in 2024. Lower grain prices may allow producers to limit expected cuts in production, and productivity gains could also help offset the impact of a smaller breeding herd. However, with the economy expected to slow down further in the next 12 months, and Prop 12 constraining demand in the biggest domestic market, the pork industry will likely remain in a contraction mode. Export demand remains very important and over time US pork should benefit from the sharp supply contraction in several major European countries. China was a big part of global demand growth between 2019 and 2021. As Chinese demand has slowed, export markets have become more competitive. Weaker domestic demand and a slowdown in export demand are key to understanding current pork industry issues.

Supply implications of June H&P Report: Pork supplies this summer and fall are expected to be at or above year ago levels. This is a bit higher than pre-report expectations. Weekly slaughter should be under 2.3M head through July, consistent with the seasonal decline. Combined with lower weights, this will tend to limit the supply of pork coming to market. Supplier will likely hold on to their cold storage inventories accumulated before June 30 to feed California demand. This means that there will be some need to build frozen inventories for export, at least in the near term, and this should help prop up prices. Last year weekly slaughter was over 2.5 million head by the end of September. The hogs and pigs data shows supplies will be above those levels this year. Mar-May pig crop was 0.8% higher than a year ago, implying that weekly slaughter could be near 2.6 million head by late October and early November. Supply is expected to be lower in the winter and spring of 2024 but there’s plenty of uncertainty as to what supply numbers to expect based on the surprise in productivity

What surprised us the most: Pigs per litter, farrowing intentions and breeding herd. USDA reported the during Mar-May producers saved 11.36 pigs per litter, a record level. This represented a 3.3% jump compared to the previous year and it more than offset the reduction in farrowings. COVID related labor issues and PRRS significantly impacted productivity in the last couple of years, which may help explain the below trend growth. At the same time genetics has continued to improve at a pace of +1.5% per year. As factors constraining productivity gains eased this spring, productivity took a step up and it is currently approaching the previous trend line (see chart). Producers are far more negative about the future, reflected in their expectations for farrowings in the next two quarters. Jun-Aug farrowings are expected to be down 3.9% y/y and Sep-Nov farrowings are expected to be down 4.5%. But if the trend in productivity numbers has changed, then much of the reduction in farrowings will be offset by higher pigs per litter. Rather than winter and spring supplies declining by 3-4%, the reduction could be more like 1-1.5%.

Headscratchers: The breeding herd for March 1 was revised down but June 1 inventory was higher than expected, 50k head bigger than in March and just 22k head lower than last year. Sow slaughter was up only slightly from a year ago. Sow/boar imports were down. The numbers imply gilt retention down by less than 4%. Analysts think producers need to see more pain before they make the difficult decisions to cut back. Expectations for lower corn prices probably have some dragging their feet. The ratio of farrowings to breeding herd during Mar-May was 47.5%, a full point lower than a year ago and the lowest in 20 years. Estimates for Jun-Aug farrowings are not much better. Either something has changed structurally or USDA is missing something.

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