Hog futures have sold off quite aggressively in the last few days as market participants respond to the dramatic decline in cash hog prices. But why the sudden turnaround, after all wasn't excellent pork demand and new processing plants supposed to change the trajectory of hog prices this fall? We don’t think demand has changed materially although one needs to consider the impact of sharply lower fed cattle prices going into the fall. Rather, the shift in hog supply availability, evident to anyone that has looked at a hog slaughter chart, appears to be the primary culprit. It also does not help that too often we think that just because we cut the ribbon on a new processing plant it will increase daily processing capacity by 20,000 head a day overnight. It will likely take months before we get those plants running as they are supposed to and, in the short term, there is a few million extra hogs that will need to get processed.
Retail bacon prices have now adjusted to reflect wholesale prices earlier in the summer. According to the monthly USDA/ERS retail price data released yesterday, the average August retail bacon price reached an all the time record high of $6.24/lb., 7.3% higher than the previous month and 14.5% higher than the previous year. The previous record retail price for bacon was set in the summer of 2014, when it surpassed $6 per pound. Back then, retail bacon prices remained at elevated levels between May and October as the spread of PEDv caused a significant shortfall in pork supplies. That is not the issue today. Hog supplies are expected to increase rapidly in the next few months while seasonal demand for bacon subsides somewhat. Total pork inventories in cold storage at the end of August were 575.7 million pounds, 5.5% less than the previous year and 2.1% less than the five years average. While pork inventories rose 3.8% compared to the previous month, this increase was generally in line with what we normally see during this time of year. In the last five years ham inventories have increased by an average of 19% from July to August. This year the increase was just 4%. End users normally build ham inventories between May and September in order to support holiday demand. However, with pork production expected to hit all the time record levels this fall, some end users may have opted to slow down some of their inventory build. We continue to see very robust pork export demand and the smaller inventories should be supportive of the pork market later into the year.
