Pork Profit Maximizer November 26, 2018 – Food Service Edition
Speculation about Chinese pork supplies and prices in 2019 continues to drive hog market forward premiums
The pork cutout finished last week at 0.6693 cents per pound, 15.4 cents or 18.7% lower than a year ago. All pork primals are currently trading lower than a year ago, with bellies, hams, and loins accounting for the bulk of the decline. Hog slaughter hit an all-time record high at 2.618 million head in the week prior to Thanksgiving, in part because producers sought to market their hogs before the holiday-shortened week. In the short term, the pork market appears to be well supplied and pork prices have adjusted lower in order to keep the flow of product moving, whether into export markets or domestic retail case. Given a steady demand, rising supplies necessitate lower prices in order to clear the market.
But true as that is for the short term, futures markets have rallied in recent days and they hold a significant premium for next year. On Friday, CME hog futures for all of 2019 averaged almost $0.76 per pound compared to an average of $0.65 cents per pound in 2018 (Nov/Dec reflect current futures). So production next year is expected to increase between 3 and 5%, depending on what forecast you look at and yet futures are pricing a 17% price premium. We doubt this reflects any sort of demand shift in the domestic market although that may happen if broiler producers decide they want to bring a margin back in the business and start to truly cut back. Rather, we think the futures premium for 2019 reflects speculation about the level of export demand that we may see due to the spread of African Swine Fever and the elimination of Mexican tariffs on US pork.