Export Slowdown Highlights Downside Risk for Pork and Hog Values This Fall

US Hog Prices Currently Above EU and Canadian Hog Values, Presenting Challenges for Export Demand as Supplies Seasonally Increase This Fall

There is a fair amount of uncertainty about the outlook for hog prices in the second half of the year even as in the near term the pork cutout remains in very good shape and the CME index holds a premium to August.

Lean hog futures for October settled near $88/cwt on Friday, a 16% discount to August futures and an almost 21% discount to the current value of the CME lean hog index. As big as this discount may appear, it is not particularly large.

Consider recent history, for instance. In 2017, the summer hog market peak was $92/cwt, but by end of September cash prices as calculated by the CME index were down 42%. In 2018, the peak to trough drop was 48% and in 2019 the decline was 36%.

If anything, current futures are pricing a smaller than normal decline as they account for continued strong demand in the domestic market and robust export business. For producers and other market players that have participated in the market for some time, lower hog prices in the fall are the norm rather than the exception.

Hog Supplies Seasonally Increase by September and Heavier Weights Add to Overall Tonnage

By the end of September weekly hog slaughter should be about 300,000 head larger than it is today and the average weight of barrows and gilts coming to market should be about 5 pounds larger than it is today.

While we can quibble about the details, there is general agreement about the supply trend in the next few months. Demand, on the other hand, is far more uncertain. While ham demand generally benefits from holiday parties, demand for some fresh pork items gets a bit wobbly and lower prices are needed to keep the flow of product moving.

Export demand has been key for the pork market in the last 20 years and it remains a major driver. For one thing, about two-thirds of the supply growth the U.S. pork industry has experienced in the last 15-20 years has been supported by growing exports.

We think this year exports are far more important for another reason — tight labor supply. It has been difficult for packers to run full trim and fabrication lines due to the current tight labor market. One can see the effect of this in the ongoing widespread between trimmed/boneless products and bone-in cuts.

Take an item that is very popular during this time of year – spareribs. In recent years the premium of St. Louis style spareribs to regular trim spareribs has been about 50 cents to a dollar. A few weeks ago, St. Louis style spareribs traded as much as $2.80 over the value of regular spareribs.

The challenge for packers could come this fall when they may still face tight labor supplies and will need to move a larger share of production into export channels. The benefit from exports is that usually the product is not trimmed to the retail spec that domestic users require. It is far easier to ship bone-in large hams to Mexico than it is to convert them to boneless ham muscles, for instance.

This is why the chart below is somewhat concerning.

U.S. hog prices are currently trading as much as 23% higher than Canadian hog prices and 32% higher than EU prices (in USD terms).

China was a major driver of U.S. pork export demand in 2019 and 2020 but so far this year China has imported 33% less pork from the U.S. but 19% more pork from the EU. Chinese purchases of EU pork have come even as they no longer import from Germany, which was once the second-largest supplier. In June, Chinese purchases of EU pork were down as well.

Export Sales to Mexico Jumped Last Week, but Sales To Other Markets Remain Weak, Adding to Demand Uncertainty When Supply Picture Shifts

Pork export shipments have slowed down in recent weeks and shipments for the week ending July 22 were under 30,000 MT. Still, this is a robust number from a historical perspective and especially given current slaughter levels.

The most bullish number in the report were net sales to Mexico, which surpassed 25,000 MT last week, 159% above the average of the last four weeks and a record high. The big sale to Mexico helps explain why the ham market has traded so firm in the last two weeks. Last week the ham primal value was pegged at near 105/cwt.

While sales to Mexico lifted the total sales number, sales to other markets remain disappointing. Sales to China, last year our top market, were a mere 807 MT and in the last 5 weeks, sales to China have averaged under 3,500 MT.

Sales to Japan at 3,175 MT were 43% lower than the average of the last four weeks and sales to South Korea were just 307 MT, 19% lower than the four-week average. Shipments to South Korea last week were 2,061 MT.

The recent decline in sales should cause shipments to trend lower in the near term. Sales to Canada were also light at 654 MT, down 67% from the average of the last four weeks and well below the current level of export shipments. Overall net pork export sales were a robust 38,502 MT, with Mexico accounting for an outsize share of this total.

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