How Long Will Profitability in the Pork Industry Last?
Producer profitability has been phenomenal lately, but how long will it last? Rob Murphy, J.S. Ferraro & Company executive vice president, research and analysis, shared his perspective on what’s ahead in the third quarter (Q3) of 2021 during J.S. Ferraro Market Intelligence’s Q3 Big Picture Market Outlook webinar on July 21.
“From the beginning of the year when prices were around $79 per hundredweight, it went almost straight up to $135 per cwt., where it peaked in the middle of June. It was a pretty impressive rally – almost exclusively demand-driven,” Murphy says. “But I do believe that has finally turned.”
He expects to see prices start to drop again in the next week or two and work their way back down below the $100 mark on the cutout sometime around Labor Day.
Q3 Pork Production to Fall Below Last Year
Q2 pork production has been above last year’s COVID-19-disrupted levels. However, lighter slaughter and potentially lighter carcass weights in Q3 suggests pork production could be 3% below last year, Murphy says.
“This is important for buyers because as pork production falls well below last year, well below normal levels, I think we can expect pretty strong pricing as we go into the fall. Our estimate for Q3 pork production is down about 3% from last year’s admittedly elevated levels,” he says.
He expects Q4 pork production to be more closely aligned with what the pork industry has seen in previous years, going up or down 1%. He forecasts Q4 supplies are going to be relatively close.
Labor shortages in packing plants pose risks for Q4 production. He says packers have about three or four months to get the labor situation straightened out so they can push through the larger numbers of hogs in November and December.
“I'm hoping the packers will raise wages or do whatever they've got to do to find enough workers to make sure we can process the seasonal bulge in hog supplies that comes at us every fall,” he says.
If a bottleneck develops during the highest production period of the year, hog markets could come under intense pressure again.
“If that bottleneck happens, we may not be able to reach last year's level for Q4 production. But I don't think we're in a situation where we're going to have serious shortages of pork,” he says. “I think it's going to be a relatively normal fall as far as pork production goes.”
Cold Storage Stocks Remain Very Low
Part of the issue in the pricing scenario are low cold storage stocks. When plants shut down last spring, prices soared and people got product out of cold storage, Murphy says. Unfortunately, they have not rebuilt those stocks yet.
“Keep in mind cold storage stocks act like a shock absorber. They keep prices from getting really high if you have plenty of stocks because people can draw out of cold storage. But they also keep prices from getting really low because when prices start to deteriorate, people will buy it and put into cold storage,” Murphy explains.
Since stocks are so low, he says it’s a great opportunity to add to cold storage this fall.
“If price levels pull back, there's got to be a lot of users out there that wish they had bigger stocks than what exists now,” Murphy adds.
Is Super Strong Pork Demand Starting to Fade?
Retailers have been raising pork prices aggressively and Murphy says that will help to cool down consumer interest in pork. Those retail prices are unlikely to decline much this fall.
“Consumers are finally now starting to see the full price of pork. I suspect that when they do, they're going to back off a little bit,” he says.
In addition, consumers have busier schedules now and can get out and do things they couldn’t do during the pandemic.
“During the pandemic, cooking at home was a really big deal. People bought a lot of meat, they prepared it, and it was an activity for them. Now it has subsided somewhat. They're out there traveling again, they're going to gatherings, they're going on vacation,” he says. “They're not as focused on at-home meal preparation as they had been, and that I think will contribute to the fade in pork demand as we move into the fall.”
Murphy says the fade of consumer demand will be a slow, steady process.
“As pork prices lower trend lower into the fall, packer margins should expand. We got to solve the labor problem in packing plants that could become an issue come fourth quarter,” he says.
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