Supply Surprise Weights on Market, Prices

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Doubts Mount About That December ‘Hogs and Pigs’ Report As Supply Far Exceeds Estimates And Speculators Jump Ship

December Hogs and Pigs Report

Following the release of USDA’s December ‘Hogs and Pigs’ report, there was broad expectation that pork supplies would remain limited through at least spring. The inventory of market hogs, which are hogs that will be marketed between December and May, was estimated at 66.966 million head. That is down 1.355 million head or 2% compared to last year. The breakdown of this inventory into subgroups, depending on weight, also showed that all subgroups were down about 2% from a year ago.

So far, the supply of hogs coming to market has differed greatly from expectations. Through the week ending January 28, weekly slaughter has been a total of 19.173 million head. That is just 22k head or 0.1% lower than a year ago. Market participants would be justified to ask whether that shortfall of 1.3 million hogs is still in the cards or if USDA simply understated the inventory.

Judging by the reaction of speculators, market seems to believe that USDA missed the mark. At the start of the year speculative funds held a net long position of around 50k contracts in lean hogs. As of January 24, managed money net position in lean hog futures was a negative 5,240 contracts. In other words, speculators now hold a net short position in the lean hog futures contract.

Higher Belly Inventory

The higher-than-expected supply coming to market, ample freezer stocks for some products and increased competition at retail have all combined to pressure the pork cutout. At the end of last week the pork cutout was at $79.25/cwt, down $17/cwt (-18%) from a year ago. The chart below outlines what has contributed to this sharp decline in wholesale pork values. By far the biggest contributor were bellies. They accounted for $11.6 out of the $17 decline in the value of the cutout.

Starting in December, we have been warning about the impact that heavy belly inventories could have on overall pork pricing in Q1. USDA reported that at the end of December there were 63 million pounds of bellies in cold storage. This was not as high as we thought the inventory could be. However, it is still quite large and 66% higher than a year and 45% higher than the five year average. With slaughter at +2.5M each week in January, and plenty of bellies already in the freezer, spot belly prices have been under pressure.

Pork Cutout Breakdown

Loins have been weak as well. They are down 18% from the same period last year and contributing about $4.6/cwt to the decline in the cutout. Increased competition at retail from chicken and ample spot supply have kept belly prices below year ago levels.

Picnics have come under pressure since the start of the year. That’s not unusual considering the slowdown in demand in Q1 and lack of any significant export demand from Asia. Rib inventories remain heavy, and this is keeping rib prices low for the moment. Ham market is the only item bucking the trend as Mexico demand remains robust. Freezer inventories at the end of December were 13% lower than a year ago. Additionally, processors are getting ready for Easter business. Still, boneless ham prices are far lower than expected at this time, an indication of slowing domestic demand. In all, pork prices are off to a slow start. Market participants are paying close attention to the trend in hog/pork supplies for Q1. They are likely starting to adjust expectations for late spring and summer as well.

Cold Storage Update

Coming into the report there was a lot of focus on belly inventories. In this regard the numbers were not as bearish as expected. Total belly inventory at the end of December was 63.1 million pounds, 65.6% higher than last year and 45% higher than the five-year average. This large supply will continue to negatively impact belly prices in the near term. December inventories increased 16% from November compared to an average gain of 24% in the last five years.

Ham carryover stocks for 2023 are much lower than normal, which should continue to support ham values. At the end of December, the supply of hams in cold storage was 13% lower than a year ago and 25% lower than the five-year average. However, inventories declined just 3% compared to November vs. a 22% average drawdown in the past five years. So while the belly numbers were not as bearish as expected ham numbers were not as bullish as forecasts were suggesting. Inventory of pork ribs remains burdensome at 113.6 million pounds, 42% higher than a year ago and 11% higher than the five-year average. Pork trim inventories have increased sharply, up 19% from the previous month.

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