As consumers anticipate grilling season and as hog supplies decline seasonally, hog and pork prices typically increase during this part of the year. However, 2012 has proved an exception, thus far anyway.
Lean hog futures have declined sharply over the past week and the reduction can be traced to the weak demand for pork, according to Rich Pottorff, Doane chief economist. Despite robust pork exports, which were up year-over-year in both January and February, the low pork prices suggest that domestic demand is weak. The economist sees rising pork prices as the key to a rebound in hog prices.
According to Pottorff, the pork cutout value fell to a new low last week and one needs to go back into December 2010 to find similar cutout values.
Pottorff sees few signs that pork prices will improve and further reduction in hog prices may be in the cards. “Using the pork cutout value as a benchmark, cash hog prices are still high, about $4 above the cutout,” he says. “Nearby futures are even further out of line with the June contract, more than $10 above the cutout. Put another way, there’s been an 11 percent decline in cut-out value since January. Last year, it rose 24 percent over the same period.”
The causes for the weakness in pork prices are unclear, Pottorff says. He cites lower broiler production and beef production compared to year-ago levels. “Pork did not appear to gain any benefit from consumers’ reaction to the lean, finely textured beef, (LFTB) controversy.” The improvement in the beef market suggests that the negative impact of the LFTB controversy is subsiding and seasonal improvement in beef demand may also be gaining traction.
Pork prices will not receive support based on USDA’s Cold Storage figures released last week. The report revealed higher inventories for pork and beef, which is bearish for both, according to the CME Daily Livestock Report. “Beef inventories normally decline in March but this year they actually rose 6.1 percent from the previous month,” according to the CME report. “The inventory of beef cuts rose 20 percent from the previous month and was 14 percent higher than a year ago. Total pork in cold storage was 612.6 million pounds, 6.7 percent higher than a year ago and 8.1 percent higher than the five year average.”
“There is still hope for the market to return to the ‘normal’ pattern, but it is clear that this will be a very different year than 2011,” Pottorff says.