Steiner and Company produces the Profit Maximizer report on behalf of National Pork Board 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.
- Prop 12 has end users in California depleting inventories of product that will not be compliant by July 2. This is having a negative impact on spot pricing.
- Some buyers outside of California expect more supply available in July due to the disruption caused by Prop 12 compliance. Those buyers are also limiting buying, creating more havoc for spot prices.
- It remains to be seen what California officials will do. Will they change rules if it becomes clear there will be a significant shortfall in supply. Will this result in a short covering rally? There is a lot of noise and uncertainty.
- Strong sales to Mexico have supported ham prices in the near term. But, with all the Prop 12 uncertainty, ham values are also coming under pressure.
- Pork trim prices remain under pressure even as hog carcass weights are trending lower and hog slaughter is about the same as last year. Inventory drawdown and extremely low sow prices have negatively impacted pork trim prices in the near term.
- Little has changed in the belly market, with prices significantly below year ago levels. At some point retail demand will kick in. Prop 12 impact is a wild card, however.
Pork in Cold Storage
According to USDA, the supply of all pork products in cold storage at the end of April was 565.5 million pounds, 6% higher than a year ago but still about 1.1% lower than the five-year average. Inventories at the end of April were well below the levels we saw in 2018 and 2019 but that may not be especially helpful in understanding current market dynamics. Rather, what’s more important is that inventories in April increased by 6% from the previous month, far more than what is normal for this time of year. This suggests that even as pork production did not register a significant increase, a slowdown in sales resulted in some of the supply being stuck in cold storage.
End of Pandemic Support
The end of pandemic support structures has significantly impacted consumers, especially those on the lower end of income distribution. SNAP benefits have been significantly reduced or eliminated for many recipients, directly impacting meat protein prices. SNAP recipients are now saying they are buying less meat protein than they were doing just a couple of months ago.
The end of SNAP benefits for some consumers is not the only change impacting the market. It is broadly expected that people will start to make payments on their student loans this summer. A decision from the Supreme Court on this matter is expected any day. Some estimates suggest that payments may start by the end of August, with September 1 seen as the more likely scenario. This will also impact consumers on the lower end of the income scale that are already struggling with a higher credit card debt load.
The Supreme Court decision about Proposition 12 in California makes the demand picture even more complicated. Even before this decision, market participants were concerned about a slowdown in retail sales.
The Supreme Court allowed the Prop 12 law in California to stand. The law requires a change in the way producers house and handle sows. Currently, only a small share of the breeding herd meets the criteria outlined in California’s Prop 12. It should also be noted that Massachusetts has a similar law on the books and that law is expected to go into effect by mid-July. The combined population of California and Massachusetts is about 14% of the US. However, these two states are above average in terms of per capita expenditures. The combined personal expenditures of these two states represent about 17% of national expenditures. Already the price paid by consumers in these two states is higher, a function of higher incomes. California has a more diverse population. Data suggests that almost 40% of the population in California is Hispanic. Our initial assumption was that a larger Hispanic population means higher pork consumption but that’s not what the data says. According to a USDA study, the largest pork consumption on a per capita basis is among blacks then whites, and then Hispanics. This may impact the overall estimates of pork consumption in California which has a larger Hispanic or Latino population and a relatively small (6.5%) black population. How much pork that currently goes to California will need to go elsewhere? It’s a question that many are asking but no one knows the answer to. First, we don’t know how much of the current pork supply will be available for California consumers. Some retailers already are compliant, such as Whole Foods. But others may find it quite difficult to replace the supply needed. Steve Meyer, a well-respected ag economist, in a recent presentation, suggested 5-8%. That estimate could very well be correct although we guess that it may be on the higher end of the range.
Effective September 1, 2022, the California Department of Food and Agriculture (CDFA) required that breeding pigs be housed in systems that comply with new standards outlined in Prop 12. Courts stayed the enforcement of the law as the case made its way to the Supreme Court. The stay will be lifted on July 1. The following day, the enforcement of the law goes into effect. The law says that “no person shall knowingly engage in a commercial sale within the state of whole pork meat for human food if the whole pork meat is the product of a breeding pig, or the product of the immediate offspring of a breeding pig, that was confined at any time during the production cycle for said product in an enclosure that fails to comply with all of the standards set forth in Chapter 10, Article 3, regarding Breeding Pigs.” It appears to us that all product in the meat case needs to be compliant starting July 2.
It is always possible that CA officials may adjust current rules to avoid a significant supply disruption. But it is far from certain.
Steiner Consulting Group 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.