Market Outlook
My long-term outlook is higherBy Dennis Smith
Starting first with supply, my outlook is for declining global pork production in 2023 as a bullish fundamental. Pork producers in Europe have been slammed first by African swine fever, then hit hard by a drought last summer driving feed prices sharply higher followed by a spike in energy prices. Finally, most pork producers in Europe have been hit over the head by new and aggressive climate change regulations.
The response has been a massive cull of the breeding herd in all major European pork producing countries except Spain. The result is record high pig prices across the EU. Because of record high input costs and the fact that ASF continues to spread across the continent, many producers are still not making money despite record high prices. For U.S. pork producers, the situation in the EU is a bullish force.
The U.S. pork supply is still open for debate, in my opinion. Normally, I don’t like to argue with the USDA, but currently they’re projecting pork production this year at 27.410 billion pounds, up 1.5% from last year. Yet, the December Hogs and Pigs report projected butcher hog numbers to be down 2% during the first half of this year. The USDA is banking on rising pork production in the third and fourth quarters.
Expansion in the U.S. pork industry? Historically, expansion in the U.S. hog herd is driven by one item, profits. As most readers well know, profits in raising hogs over the last six months have been slim to none. I’ll be very surprised if the upcoming Hogs and Pigs report, due out March 30, shows any level of expansion. Instead, odds favor that this report will come in friendly when compared to the current USDA projection.
Recent excessive hog supplies created by harsh weather conditions in the Corn Belt in December and again in February appear to be waning fast. Year-to-date slaughter at the end of January was up 3%. Currently, the year-to-date kill is up about 1.5% and declining each week.
The industry is working through the backed-log supply. Seeing the kill run from up 3% to down 2% possbily by the end of March is a major swing down. In addition, the fact that hog weights have been consistently running below year ago weights suggests that producers have also been pulling pigs ahead of schedule, likely in response to poor feed ratios.
Finally, on the supply side of the equation one must be aware that beef production is slated to drop sharply this year. Current projections peg beef production to drop 5.8% compared to last year. So, when combined, total red meat production, at 54.259 billion pounds, is projected to decline 2.8% this year. Simply put, higher beef prices will support pork prices this year.
Demand for U.S. porkAs is nearly always the case, projecting the demand side of the equation is much tougher than supply. What is known for sure is that currently U.S. pork is the cheapest pork in the entire world. This fact will continue to attract demand from our major export customers. U.S. pork exports to Mexico, Central and South America are projected to remain strong. Pork exports to Japan, which were lower last year, are also projected to improve.
Regarding U.S. pork exports, the major wild card this year is China. Pork exports to China last year suffered greatly, mostly due to COVID. The Chinese economy is opening up and there’s a good chance, in my opinion, that China may be in for U.S. pork muscle cuts by late spring. Exactly what’s happening in China is largely unknown. Recently, however, they have re-listed several Canadian pork plants for shipment to China. My sources are reporting that ASF is on the move again in China.
Following the disease outbreak in 2018, the structure of the pork industry in China has changed dramatically. Thousands of backyard farms are gone. Feed restrictions are in place, no swill feeding which increased their demand for corn and has kept corn prices in China record high.
They’ve gambled on huge mega-farms that raise pigs in high rise buildings near urban centers. If new cases of ASF develop in China, due to the changing structure of the industry, the devastation could be magnified greatly. Again, my sources believe that China may be importing pork muscle cuts from the U.S. by late spring.
The domestic demand for pork has been a hard to explain riddle. The most curious problem has been poor domestic bacon demand. Retailers have been very slow to lower bacon prices. In addition, the QSR (quick service restaurants) demand for bacon has been off greatly this year. One contributing factor seems to be the “chicken wars” at QSR as they compete for chicken sandwich demand. This shifting strategy has reduced the focus on bacon and in some cases caused QSR to totally take bacon off the menu choice. Admittedly, I am not a retail expert or QSR expert, so this issue is out of my lane.
The demand for the other pork primal cuts should be strong given their attractive price and given the fact that U.S. unemployment remains historically low. The widespread outlook for recession seems to be constantly kicked down the road as the U.S. economy continues to create jobs. As mentioned above, beef prices are headed higher. This will put pork in a good position at retail in the months ahead.
One observation made recently is that pork packers have been aggressively bidding for cull sows which typically are used for the manufacture of pizza toppings and sausage. Cull sow prices have nearly doubled since January, moving from 45 cents/lb. to over 70-cents. This price action triggered by packers seems to reflect strong consumer demand.
Finally, a historical look at the beef/pork ratio, at roughly 3.30, would suggest that pork is undervalued relative to beef. My outlook from early spring into mid-summer is for lean hog futures to move higher and possibly sharply higher.
Sharply higher would be easily accomplished if the upcoming Hogs and Pigs report confirmed zero expansion in the U.S. hog herd and/or if China steps into the U.S. pork market for muscle cuts. Recall that currently they’ve only been buying variety cuts. If only one of these two developments occurs, prices should move higher. If both occur, look for sharply higher prices, taking summer hog futures well north of $120.
In my opinion, now is not the time to be short hedged but instead holding put options or other strategies designed to leave the upside of market prices open. I’m expecting a seasonal high from mid to late June.
Smith is with Archer Financial Services, Inc. and has been a full service commodity broker specializing in grain and livestock trading for over 25 years. Contact him here.
