Hog Futures at Contract Highs in Anticipation of Lower Supplies, Robust Demand

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Full Report

Less supply than anticipated in the fall has market counting on even bigger declines in the winter and spring. For all the gripes some market participants may have with the quarterly ‘Hogs and Pigs’ report, it provides a consistent measure of hog supplies on the ground. The survey has an error rate that likely moves around during inflection points. Still, it’s the best measure we have, the alternative being guesstimates skewed by personal biases. In the September survey, USDA pegged the pig crop for Mar-May at 34.123 million head, 2.1% higher than a year ago. Weekly hog slaughter between the first week in September through the last week in November was 33.104, about 50k head (-0.1%) less than the same period a year ago. The USDA survey then went on to estimate the Jun-Aug pig crop at 35.030 million head, 0.8% lower than the year before. The inventory of market hogs between 50-119 pounds was estimated 1.3% lower y/y and the inventory of pigs under 50 pounds was down 1.5%. Already, the survey was pointing to a decline of around 1-1.5% for the Dec-Feb period, and given the miss in the previous period, market is likely leaning to the low side.

At the start of 2024, storms impacted hog slaughter for one week but then weekly supply rebounded. Still, average weekly slaughter in the first eight weeks of the year was 2.537 million head/week. If slaughter is say down 1.5%, it would imply weekly hog slaughter below 2.5 million hogs per week, about 100k head less than current levels.

PPRS Talk/Speculation

There is no official USDA data on disease incidence but UMN’s ‘Swine Health Monitoring Project’ tracks sow systems that account for about a third of all the national herd. In the last couple of years the share of sow systems testing negative increased, which may have contributed to the improvement in productivity. In late October and early November the incidence rate appeared to increase (slightly). It remains to be seen if this winter PRRs becomes more of an issue, with implications for supply not only in the near term but also late spring and early summer.

Record Managed Money Net Long Position in Hogs

Managed money funds (specs) continue to find reasons to buy the hog market. Tight hog supplies in the near term and speculation about productivity/disease in the first half of the year has market participants leaning on the bullish side. Producers, on the other hand, seem to have taken advantage of this to lay off some risk, with the biggest net short position since 2021 (see chart). Whether current bullish sentiment in the market is sustained will depend on a) if supply will indeed be as tight as market anticipates and b) demand recovery persists into next spring and summer. One thing that the current market makes clear is that for now it does not believe all the talk/threats about tariffs. In the case of pork, any such tariffs, especially on Mexico that accounts for 40% of all our exports, are decidedly bearish.

Bellies, Bellies, Bellies

A big part of the higher value of the cutout and ability of packers to pay for hogs were bellies. But after the binge comes the hangover. It may already have started as prices return to trend.

Lower Cold Storage Stocks

Pork inventories declined at a faster pace than in previous years due to high prices in Sep/Oct.

• Total pork in cold storage at the end of October was 426.0M pounds, down 2.7% y/y and 13% lower than the five-year average. This was the lowest end of October pork inventory since October 2004.
• Pork inventories declined 7.1% from the previous month. This was the biggest drawdown for the month of October since 2015.
• Belly inventory at the end of October was a mere 16.2 million pounds, 42% lower than last year. This is the lowest inventory of bellies since 2021 and one of the lowest on record.
• Ham inventory at 116.1M was still 2.3% above last year but down 15% from the five year average. Ham inventory declined 25% from the previous month, the biggest October drawdown on record.
• Inventory of pork loins usually moves up in the fall but in October it was flat, as robust demand limited the supply going to the freezer. Trim inventory also limited, down 7.6% vs. five year average.

Price Chart

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