You ‘belly’ believe: pork demand has never been better

The demand for pork, U.S. pork, has never been greater. Price wise, every pork cut, with the exception of pork ribs, is trading at price levels above the previous two years.

Dennis Smith

March 27, 2017

3 Min Read
You ‘belly’ believe: pork demand has never been better
Getty Images/Sean Gallup

Pork belly stocks were drawn down in the fourth quarter of 2016 despite record large pork production. Many suggested this to be an aberration that would not likely continue. Then, stocks were drawn down further in January. Finally, as reported last week, during February a total of 2.2 million pounds of bellies were placed in the nations freezers. Belly stocks, at the end of February, measured at 16.1 million pounds, the smallest ever for the end of February and down 74% compared to stocks at this time last year.

Moving ahead, two things are reasonably certain. During spring and summer hog numbers and pork production will begin to taper off. This is the seasonality in hog production and should be the case again this year. In addition, moving into summer the demand for bellies (bacon) will increase. Again, this is the seasonality of bacon demand and this occurs every year. Applying simple economic theory, what happens to the price of a commodity when production falls and at the same time demand increases? Prices rise and in the specific case of pork bellies, higher prices are very likely to occur this summer.

Applying economic theory a little further, there’s this thing called elasticity of demand. The more elastic the demand for a commodity, the more price sensitive a commodity is to changes in price. In other words, a rise in prices will quickly result in declining demand. In the case of inelastic demand, the demand for a commodity is not nearly as sensitive to changes in price. In other words, in times of rising prices, demand is slow to drop off until a dramatic rise in price occurs.

I contend the demand for bellies (bacon) over time, has become more inelastic. This has likely occurred in tandem with the fact that the seasonality of demand has also somewhat flattened out. Simply put, demand for bellies is much more constant during the course of the year than it used to be. This is the function of many factors, the largest of which could be the widespread consumption of bacon at fast food restaurants and in the food service industry.

Given my outlook for continued strong demand for bellies, in the face of what I believe to be a more inelastic demand for bacon than in past years, I’m anticipating strong belly prices. The price of pork bellies this summer could possibly soar to all-time highs despite record large pork production.

The industry is currently bracing to accommodate record high demand for U.S. pork. Several new packing plants are under construction as well-informed packers and investors prepare for demand to continue rising. In fact, the large plant slated to open for business in Sioux City, Iowa, later this spring, is already drafting plans to add a second shift in less than 12 months. We are talking about plans to expand a plant before it’s even completed.

The demand for pork, U.S. pork, has never been greater. Last year production was record large and this year production will rise, establishing a new record. Despite this fact, frozen stock levels of all pork cuts, with the lone exception of hams, are currently measured below year-ago stocks. Price wise, every pork cut, with the exception of pork ribs, is trading at price levels above the previous two years. Pork ribs are out of favor with the consumer because of larger hogs. Thus, pork spare ribs continue to experience price levels well below the previous two years. The other exception is the price of pork bellies which are trading substantially higher than the previous two years.

You’d “belly” believe it; demand for U.S. pork has never been better and is still rising.

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

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