You probably never paid any attention to the amount of pork in cold storage. It's not part of your day-to-day world. Or is it?
Cold storage is just one more market factor that can affect the price you receive for hogs. Take last fall and winter for example, record amounts of pork moved into cold storage and they have put a chill on hog prices ever since.
"Producers need to know that the industry has huge amounts of pork in storage, and if we want to avoid a drop in live hog prices, the industry needs to get cold storage down to more manageable levels," says Ron Plain, University of Missouri agricultural economist.
The USDA releases the cold storage report every month which is available at the USDA Web site at www.usda.gov/news/release/rptcal.
At the start of August, there was an 11-day supply of frozen pork on hand. That may not sound like much. But look at it this way: If no hogs were slaughtered for 11 days, the consumer would see no effect at all. Plain says that number needs to drop to a six-day supply.
One reason that cold storage supplies have weighed on live hog prices is because packers own the lion's share of pork in the coolers. It stands to reason that packers are reluctant to bid aggressively for live hogs when they have a freezer full of frozen pork to get rid of.
When a packer slaughters hogs, he has three channels for the pork. He can sell it as fresh pork, have it cured or smoked, or he can freeze it to sell later. Freezing the pork is attractive when supplies are high and prices are low. The packer is essentially gambling that hog supplies will drop and/or prices will rise in the future.
For example, say a packer has a market for 90 percent of his pork loins at an attractive price. He can try to push the other 10 percent of the product onto the market and risk lowering his profits, or he can put the extra 10 percent in cold storage and wait until he needs it.
But this excess does not necessarily mean demand is down. "One reason we didn't eat as much pork as we produced is packers speculated that they could save pork until it would be more profitable, much the same way we store corn in grain bins," says Plain.
Plain says economists factored this in to their calculations and statements about pork demand.
Pork production's seasonality is another reason why cold storage comes into play. Packers know that slaughter is higher in the fall and winter. Consequently, they build up cold storage supplies between September and April. They then release those supplies on the market from April to September. This year packers added 207 million pounds into cold storage between September and April, for a total supply of 595 million pounds. Starting in December, pork in cold storage reached its highest level in nearly 30 years.
Some of the cold storage growth is due in part to growing export demand. Pork is much less perishable when it's frozen. Last year weak economies in other nations reduced exports and added to the U.S. pork supply problem.
Since peaking in April, cold storage has since been falling – 585 million pounds in May, 536 million pounds in June and just more than 500 million pounds in July (the last date available).
This is encouraging, particularly when you consider that the U.S. government's humanitarian food sales to Russia, which will consume 100 million pounds of pork, is not reflected in those numbers. Only limited amounts of the pork in the package will come from cold storage.
While the cold storage supplies are moving in the right direction, there's still cause for concern. Plain says pork needs to be at 350 million pounds or less by late September, or live hog prices will suffer. "If it doesn't drop to that level, packers won't be able to move pork into coolers this fall and winter," says Plain. "There will be a lot more pork produced in the fourth quarter and the first quarter of next year that is usually stored."
That could pressure prices more than hog numbers would suggest. If the industry does not reduce cold storage pork supplies, then many of the hogs slaughtered this fall and winter will need to go into the fresh pork market. That will backup the system and drive down live hog prices. Plain says declines into the $20s could result.