A huge drop off in pork production will once again cause prices to soar.

Dennis Smith

November 8, 2021

4 Min Read

If you’ve been following my monthly articles, you may recall the spaceship launch I predicted last January and February. Sure enough, hog prices were sharply higher into the early summer months. But, the strength in the cash hog market suddenly ran out of gas in mid-June. This development coincided with a ruling to satisfy a union demand calling for slower chain speed in the slaughter line. Packers used the ruling to back off the aggressive cash bids. Suddenly, with slower chain speed a forced affair, there were enough hogs to satisfy demand. The rally was over.

Because demand for pork was not impacted by the ruling, only the chain speed, packer processing margins went from negative to highly profitable in a matter of a few weeks. The cash hog market is still declining but is losing momentum quickly. The downward spiral in cash hog prices is near an end. The ruling blindsided the hog industry and robbed producers of millions of dollars.

In the wake of the COVID-19 and its disastrous impact on the hog industry, U.S. producers had already started contracting the herd. In the wake of the court ruling and top in the cash hog market, the contraction has continued at what appears to be a fairly aggressive pace. For the first time in years, the U.S. hog herd is facing a severe contraction, one that should continue into early next year and perhaps even longer.

In addition to U.S. herd contraction, my sources indicate that major contraction is also occurring in major pork producing countries in the EU. Spain, Denmark, The Netherlands, and Germany are all contracting their herds. African swine fever has been detected within the border of Germany in wild boars, although it has yet to be confirmed within a large commercial pig herd.

And then there’s China. My sources continue to confirm that a major herd contraction has been taking place in China for nine months. Exactly what has happened in China and what is currently happening is a moving target, meaning that no one really knows for sure what is happening. It appears that ASF continues to spread in the country. It appears the central form of government providing a massive financial incentive to expand and re-populate aggressively has created and caused a quick and massive oversupply of pork. Suddenly, all producers, promised huge profits by the government, were losing up to $200 per hog sent to market. This mess began to take shape, we believe, sometime during the first quarter. The losses triggered a massive cull, liquidation. The cull, in tandem with the continued spread of disease that caused massive panic marketing of animals, fostered the huge oversupply.

Like a dog hitting the end of its chain, for the second time in four years, a huge drop off in pork production will once again cause prices to soar. This massive hog cycle will likely continue for years as China fails to eradicate ASF. In my opinion, as long as ASF is not eradicated in China, they will be a major importer of U.S. pork.

Supply wise, what’s around the corner in the U.S. hog market is bullish. The USDA’s September “Hogs and Pigs” report confirmed the contraction in breeding stock that I’ve been discussing. The report indicated that pigs on the ground, starting perhaps in early December and lasting well into the second quarter, will run from 5-6% below year-ago levels. The really good news here is the fact that fewer numbers will take care of the slower chain speed issue for most, if not all, of 2022. The ruling reduced the chain speed by 4-5%, but the contraction will reduce the hog numbers by 5-6%. With pork demand expected to remain powerful strong in the post-COVID environment, competition once again should develop for hogs. Cash hog prices can be expected to soar higher in the months ahead. Yes, another rocket launch. Summer hog futures, in my opinion, stand a good chance of moving back above $1.20.

The aggressive resumption of China as an importer of U.S. pork will only add fuel to the fire. In addition, tight frozen pork stocks going into the summer season will also work as a bullish force.

If my analysis and predictions are proven wrong, it will likely be due to one of two things, or a combination of the two. The first hazard is the labor problem facing the U.S. pork packer. It seems they can’t solve the problem. I’m certainly not an expert in the slaughter of animals. However, let it be noted that processing hogs is a bit different from slaughtering and processing cattle. First off, processing lines are forced to deal with nearly four times as many carcasses in a hog slaughter operation versus cattle. Second, pork, unlike beef, requires a lot of “further processing,” which, of course, requires labor. Hams need to have the bone removed, further packaging and wrapping of hams is required, bellies need to be cured, sliced, and packaged, loins need to be de-boned, and making sausage and pizza toppings also requires labor. Packers need to solve this labor problem so specific product can be manufactured to meet specific demand. Exactly how packers solve this riddle remains to be seen.

The second hazard is pretty self-explanatory—ASF. If we have an ASF event in the U.S., all bets of a bullish market are off.

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

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