Plentiful supply should keep pork at the top of merchandising lists
Preparing for the grilling season, two questions are top of the mind for a pork retail merchandiser:
- Is there enough pork supply?
- Will prices allow me to feature pork successfully?
The latest data offers a firm yes on both counts.
According to USDA and Steiner Consulting data, the inventory of all hogs and pigs on December 1 was 3% larger than last year’s record levels. Slaughter has been running roughly 7% above year ago, and in Q2 pork production is forecast to be up between 3 and 3.5%, to 6.833 billion pounds – a new record for this time of year. By comparison, pork output in Q2 of 2020 is forecast to be 218 million pounds more than a year ago, and half a billion pounds more than two years ago.
So what does this mean for retailers? For starters,
retailers should have ample opportunities to feature pork this summer
Spread of Coronavirus in China could leave more pork into domestic channels
Production growth is only a piece of the supply picture, albeit a very important one. In recent years, trade flows have become increasingly important. Ten years ago, 17% of the pork produced in Q2 went to export. Last year, the export share increased to 23%, and looking ahead to Q2 2020, we estimate exports will account for 26% of all U.S. pork produced.
Last year, panic about explosive China demand resulted in fewer pork features during the critical grilling season. However, it turned out those fears were overblown, and as a result we had a record supply of pork available through domestic channels, leading to far lower prices in June than expected.
This year, we expect exports to be higher, but the spread of Coronavirus and resulting supply chain bottlenecks have created significant uncertainty. Although the U.S. and China signed a trade deal that sets aggressive targets for purchases of U.S. goods, in the near term, supply flows have been disrupted, resulting in pork getting backed up in freezers.
Prices for key grilling season items are substantially lower than just a few short weeks ago. We do not know how the Coronavirus situation will play out in the next few months, and hope it is contained. But in the near term, the situation has brought domestic retail demand to the forefront. The chart above illustrates that, even with an assumed 17% increase in exports for Q2, per capita availability will be near record highs and almost 6% higher than the long run trend. If exports do not match those aggressive forecasts, even more pork will be available for domestic consumption. U.S. pork exports will likely increase in the second half of the year, but so will pork supplies. It is important to always view export demand in relation to the supply available. For now, the U.S. pork producer has plenty of product available for the domestic market.
Price outlook and seasonality
Pork prices normally are higher in Q2 vs. Q1 for the simple reason that supplies seasonally decline at a time when grilling demand significantly improves. Foodservice also sees a significant improvement in foot traffic during this time of year, further adding to demand. But in any given year, there will be differences as to price performance from one quarter to the next. The degree to which these expectations are influenced by outside factors (futures market speculation, early price spikes, supplies of competing products) will greatly affect pork features. Last year, there was a lot of speculation in the market that a trade deal with China and the spread of African Swine Fever in Asia would result in dramatic price inflation. As processors and retailers sought to cover their needs, prices did indeed move up at a faster pace than simple supply/demand would suggest. For example, the price of pork butts in Q2 of 2019 was up 47% compared to February 2019 prices, and the price of picnics was up 43%. This helps explain why features were down in 2019 compared to 2018 levels.
What are current hog futures currently telling us about potential prices in Q2? The table below gives a summary of where prices for a number of items currently stand, the price ratio of these items vs. CME hog futures for Q2, and the relative prices that futures suggest for that period. This is simply an indication for the retail buyer to tie the current hog prices traded in the futures market to the specific cut that they may want to secure. In some cases, futures are currently suggesting a much lower price increase into Q2 than what we have seen in previous year. This may or may not happen, but it may offer an incentive for packers to work with retailers to run more pork promotions during the grilling season.
It will be spring before we know it. Pork supplies are expected
to be plentiful and the disruption to trade with China, at least in the very
near term, offers plenty of opportunities to feature pork this coming grilling
season. What last year taught us, and the first few weeks of this year have
reinforced, is that volatility in the meat market is now par for the course.
Take advantage of opportunities as they present themselves, and there are
currently plenty of opportunities to be had.
This economic analysis is provided by Steiner Consulting Group.