As a pork producer, the current market dynamic must be disheartening, says Altin Kalo, chief economist for Steiner Consulting Group. Beef packers are paying top dollar to get animals bought, with fed cattle prices up 12% in the last three weeks alone. Hog producers, on the other hand, have watched prices drop and unhedged production is deep in the red.
“Its tempting to conclude that somehow beef producers must be doing something right, getting consumers to pay up for beef while pork producers are bringing to market an inferior product that people simply are not willing to pay for. The hot take often appeals to pissed off fans but does little to explain what’s going on,” Kalo says in the Daily Livestock Report.
The pork cutout is soft, he points out. Pork is plentiful and beef isn’t. The cutout approached $90/hundredweight (cwt) in mid-March and looked to be on a similar trajectory as the past two years. However, the cutout has steadily lost ground since then and closed at $71.6/cwt on April 17, down $32/cwt or 29% compared to a year ago. More than half of this decline is due to lower prices for bellies, Kalo explains, but other primals are also down by double digits compared to a year ago.
To understand what’s going on, Kalo says it helps to consider the two charts below.
“They offer an estimate as to the supply of pork that will be absorbed by the domestic market in Q2. The calculation for this is simple. Take expected production for the quarter + imports ‐ exports and net out what’s in storage at the start and end of the quarter. For production forecasts, we used the latest USDA estimates, with pork production forecast unchanged vs. Q2 of 2022 and beef production forecast down 5.6%,” Kalo says.
He says it’s fair to assume there was more pork in cold storage at the end of Q1. By Steiner Consulting Group’s estimate, pork carryover into Q2 was 5% larger than same quarter last year.
“And those heavy pork inventories are not evenly distributed. Our guess is that there were 30% more bellies to start Q2 than the same time last year,” Kalo says. “Those that hold those inventories, be these packers or processors, find themselves in a deep hole, especially when you consider carrying charges and yield losses. First rule of getting out of the hole: stop digging.”
Lower prices are needed at the consumer level to match up supply with demand, he adds. However, that takes time, especially when you are dealing with foodservice operators.
“People like bacon. People also like chicken wings. But you jack up the price of chicken wings on the menu to $15.99 and suddenly you sell a whole lot less. There’s plenty of 90 cent/lb. wings at wholesale these days just as there are 85 cent/lb. bellies,” Kalo says.
Of course, there is always the hope that exports will help move more supply to outside markets. Earlier in the year there were rumors China was struggling with another major ASF outbreak, Kalo says. But recent data showed Chinese pork production in Q1 was the highest point in five years. Demand from China remains lukewarm at best, with nearby Chinese hog futures steadily losing ground.
“There is no question that pork would benefit from giving consumers a better tasting product. There’s a reason Japanese buyers pay a premium for dark red loins and well marbled shoulders,” Kalo explains. “But let’s not forget that the current retail/foodservice prices for pork products are too high considering the supply coming to market. Markets adjust, it just takes time.”
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