Higher Pork Prices Explained

COVID, High Feed Costs and a Recovery in Demand Fuel Pork Price Inflation

In our update last fall, we highlighted the risk for higher prices in Q1, but even our bullish projections could not foresee the runup in prices we are currently experiencing. It is not a coincidence that prices for processing items, be it bellies, hams or pork trimmings, are currently trading almost exactly as they did seven years ago.

Back then, fears of supply shortages due to the porcine epidemic diarrhea virus caused domestic and export buyers to rush and cover their needs as early as possible. With COVID-19, it’s a host of variables that have caused a scramble for raw materials. This includes the quick rollout of vaccines, expected recovery in foodservice demand, another round of stimulus checks, warmer weather, low freezer inventories and consumers’ new-found appetite for meat.

In the March 26th raw material price update from the National Pork Board:

• The value of the pork cutout was pegged at $1.07/lb., 35% higher than the previous year.
• Prices for boneless ham were up as much as 57%.
• Bellies were up as much as 207% and fat pork trim up as much 396% from last year.

What happens this summer?

The adage that the cure for high prices is high prices may apply again but, in the short-term, demand is inelastic to price. With spring here, retailers will find that pork supply is tight.

Last year, hog slaughter was high in June and July because a significant number of hogs was backed up when COVID-19 caused several plants to close. This year, we expect to see a more seasonal flow of livestock to market.

Weekly hog slaughter in January was around 2.7 million head/wk. It is currently just over 2.5 million head/week, and by June and July it will be close to 2.3 million head per week. Pigs born (pig crop) during Dec-Feb correspond to Jun-Aug slaughter.

This year, that supply was 1.4% lower than it was last year and about the same as what we saw during the same period in 2019. Seasonally, hog carcass weights decline in the summer, which will further constrain supplies.

Will hog supply remain limited for the rest of 2021?

Hog slaughter should seasonally increase as we go into fall, but supply growth will remain constrained as producers have reduced the number of breeding animals available. The breeding herd on March 1 was estimated at 6.215 million head, down 2.5% from a year ago and the smallest breeding herd in three years.

The smaller breeding herd suggests that hog slaughter during the fall will be under what it was last year. If current strong demand is sustained, then higher prices may be needed to ration out the supply.

Ham prices were especially strong last year, in part because of robust demand from Mexico, which has been a big buyer of U.S. hams in recent weeks as well.

Labor has been a major challenge for pork packers in the last 12 months, exacerbated by COVID-19. We think the labor situation may slowly improve as much of the population will be vaccinated by summer.

Across the Pacific, China’s pork demand remains a major wild card. New cases of African swine fever there suggest that Chinese pork production may recover more slowly than earlier projected. This could mean that China will remain a significant buyer of U.S. pork this year and into 2022.

Bottom line

More limited domestic pork supply has pushed up prices. But pork is not alone as prices are up for all proteins, so inflationary pressures are part of the current reality.

However, pork remains competitive with other proteins as evidenced by the relative price of various pork cuts vs. beef and poultry options.

And while hog slaughter this fall may be slightly under 2020 levels, it will be higher than the five-year average. This suggests adequate pork supply for U.S. retailers and foodservice operators during the year-end peak demand period.