For the first time ever in modern history, producers in the US, EU and China are all culling sows consecutively.

Dennis W. Smith

December 6, 2021

5 Min Read
finishing pigs inside production facility
NPB

What I'm seeing 

What I’m seeing is a cash hog market is that bottoming out. In the week ending Dec. 3, cash hog prices were flat on that Monday and quoted higher the other four days. This is the first time we’ve seen such action in the cash hog market since the top was formed toward the end of June. The December lean hog contract has shifted from a sharp discount to the CME lean hog index to a substantial premium. In addition, I’ve noticed that the December carcass contract has also moved from discount to premium versus the cutout value. I’m seeing that a seasonal low in lean hog futures is due at the very minute that you’re reading this article. Finally, the hog spreads, with February $7.50 over December, April $4.00 over February and the summer hog contracts trading more than $24 over December futures, are clearly signaling that CA Prop 12 is not going to present a major disruption to pork distribution and pork pricing.  

A side note on CA Prop 12, before I move on is worth noting. Be clear that Prop 12 has nothing to do with animal rights, health or well-being. It has everything to do with the government telling consumers what to eat. In this case, the effort has nothing to do with hog health and happiness and everything to do with forcing consumers in California to consume less red meat. Simple as that and complicated as that. The fact that this has become a major obstacle, a major issue for pork producers is a grand failure by the industry. The lobby effort should have been aggressive and steadfast prior to the election, more than two years ago. Killing this measure at the polls, and others like them is what the checkoff dollars are put out for. I’m told the top industry group was sitting on a war chest two years ago and chose not to spend the money. Now, the industry must work its way through a major can of worms. This appears to be a major failure of checkoff dollars.  

What I'm hearing 

I’m hearing that for the first time ever in modern history, U.S. producers, producers in the EU and producers in China are all culling sows consecutively. At some point in early 2022, global pork production should begin to drop substantially.  

I’m hearing that African swine fever (ASF), regardless of what we are told by the Chinese, continues to spread and wreak havoc on Chinese pork production. Vietnam has admitted to huge losses due to ASF, perhaps even greater losses than the first go around. The disease still has a presence in Russia, which has been the case for at least 10 years. Finally, ASF is jumping around Germany at a wild pace. I’ve been told by people close to the situation in Europe that there’s great fear but high expectations that it will show up in France at some point soon.  

I’m hearing that pork is incredibly cheap when compared to beef and even chicken. Wholesale beef and chicken as well as retail beef and chicken are priced substantially higher than year ago levels. The pork cutout is slightly higher than this time last year, but most retail pork cuts are priced substantially lower than this time last year. Pork is in an excellent position to increase its share of the U.S. consumer dollar.  

I’m hearing that CA Prop 12 will not be implemented on Jan 1. Or to be clearer, it may be implemented as dictated by law but there are no enforcement mechanisms in place. So, it will not be enforced, I’m told, until at the earliest the middle of summer.  

I’m hearing that the application to grant Puerto Rico and the Virgin Islands as a “protection zone” has not been approved and granted yet. This is extremely important. This is a very cloudy situation, but my understanding is that if ASF, under the current rules, is confirmed in Puerto Rico, the U.S. pork export market would be shut down immediately. Clarification on this issue is critical. Keeping the U.S. ASF free is of vital importance to the industry.  

What I'm expecting 

As penciled out in the most recent USDA Hogs & Pigs report, I’m expecting U.S. butcher supplies to start running 6% or more below year ago levels by Jan. 1. The hog and pig projected 6% fewer numbers. I say 6% or more because so far the pace of slaughter is about 1% to 2% less than projected by the inventory report. There might have been an over-count.  

I’m expecting exports to rise during 2022 compared to 2021. This boom should be led by the Chinese, but exports should accelerate to other parts of Asia and Central and South America as well. Currently, the USDA is projecting pork exports in 2022 to rise by 3% over 2021 which would be record large.  

I’m expecting that the drop off in U.S. production in tandem with lower production in the EU and in China, in tandem with rising U.S. exports and continued strong domestic demand will trigger a huge rally in cash hog prices, pork cutout values and lean hog futures prices. Barring a COVID inspired recession in the U.S., I’m expecting that summer lean hog futures prices will soar north of $1.20. Current prices, of course, are still south of $100.  

The major hazards, all mentioned above, are a possible major disruption in pork distribution due to CA Prop 12, a potential recession due to COVID lockdown measures or an ASF event in the U.S.  

If you need help in navigating the markets, or if you would like a free 30-day trial to my daily comments please feel free to contact me at [email protected]  

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