Soaring Bacon Prices: A Boon for Hog Producers!


By Moe Agostino and Abhinesh Gopal

Let’s start with the bottom-line for a change: consumer preferences, and hence consumer demand, drive meat prices. The evidence for this fact could not be starker than in pork cuts. With “meaties” craving heartier flavours, like those in bacon, the primal cut value of pork bellies reached US$1.85/lb in February 2017.

This value was 43 per cent above levels from a year ago. The price was, however, below the 2014 record highs. Also, the significance of this value is pronounced when we compare it to pork loin values, which were at just $0.75/lb in February. (These 2017 pork loin values were 6 per cent below the levels a year ago, in February 2016.)

Strong demand for pork bellies/bacon also led to a short-term squeeze in the spot belly market, as pork bellies in cold storage as of the end of January 2017 fell 77 per cent from the year before. This January 2017 inventory reached the lowest level since the end of September 2015.

Consequently, pork cutout values and hog futures rose at a faster than normal pace in late January and February. (Cutout values are determined by the total value derived from all pork parts after slaughter.)

Historically, belly prices are flat or move lower seasonally at the end of each year. At the end of 2016, however, belly prices rose – even after seeing several monthly records for U.S. pork slaughter.

Looking at the performance of the various components of the U.S. pork cutout over the past six months, bellies clearly stand out as the big contributor. Ham cut values were up 11 per cent in mid-February compared to a year ago, the value of picnics increased by 10 per cent and the value of butts were up by 9 per cent.

Pork Cutout vs Belly Values

Loins struggled but the 6 per cent year-on-year (Y/Y) decline in loins is seasonal. (Pork prices normally drop in the winter and peak in the summer.) Consumer preference for loins, which contributes 25 per cent to the value of pork cutouts, has been eroding as preference shifts to bacon and other flavoursome meats.

Ribs were the weakest among the lot, with a 13 per cent Y/Y decline. Restaurants lowered the per-unit rib prices to control the plate cost of ribs. This cut, however, only makes up 4.5 per cent of the cutout value.

To generate higher demand, lower pork retail prices are the key, which would also move more pork out of cold storage. In January, the average U.S. retail price of pork was a little over US$3.50/lb, which was 5.9 per cent lower Y/Y. This price compares with the retail price for bacon in the same month, which was 11 per cent lower Y/Y at US$5.10/lb.

Significant rises in the wholesale prices of bacon/bellies set up a lagged response in retail prices, as retailers become more sensitive to bacon price moves.

In contrast, for pork loins, quite a wide spread exists between wholesale and retail prices, and retail values keep diminishing. These trends suggest that retailers could become more aggressive in promoting loins.

If there is a worsening of packer margins, continued improvement in cutout component values will be needed to mitigate a drop in cutout values. American pork packer margins remain healthy thanks in part to higher pork cutout values, and this in turn has prevented hog inventories (for slaughter) from getting back-logged on farms. U.S. pork production in 2017 is running at over 3 per cent Y/Y.

U.S. per capita pork availability is expected to be at or above 2016 levels, even with strong exports. Farm to wholesale hog margins should narrow with two new U.S. packer processing plants going online later this year. Increased packer demand and competition will support higher cash hog prices.

Pork Ham PIC Butt Values

U.S. pork belly prices are still higher than last fall, though they have come down from their mid-February lofty levels. Markets are anxious as to whether these higher prices can last through the spring and summer of 2017. A steep drop in pork cutout values could send futures plummeting as the market may have already factored in all this good news.

To avoid any significant weakness in futures, we will need to see significant export demand in the spring-summer of 2017. The United States Department of Agriculture (USDA) expects a 4 per cent increase in exports. Chinese pork imports again hold the key in 2017.

Robust export and domestic demand, along with strong U.S. packer margins, will help offset the pressure form large U.S. hog supplies. (The USDA has forecasted 2.311 million head, which is 3.9 per cent higher than a year ago.) Demand for U.S. pork is still strong as American prices are more competitive in the world market.

Pork Rib & Loin Values

Since last fall, U.S. consumer pork demand has improved. Higher demand for animal protein is associated with better economic growth and higher consumer incomes. The U.S. stock market indexes, which are barometers for investor confidence in the U.S. economy, have been on a record tear higher since the 2016 presidential elections. This upward move has added an extra $3 trillion in U.S. stock market capitalization and $3 billion more to consumers’ pockets. Past studies show that, with a buoyant U.S. economy and rising incomes, consumers eat out more and spend more on meat.

The financial markets and the U.S. economy are hopeful that the anticipated Trump policies will stimulate economies around the globe. Investors hope that these policies (including tax cuts, infrastructure spending and reduced regulations) will boost economies. Though the new U.S. administration may be successful in providing opportunities for American growth, markets will remain anxious due to the risks in the new administration’s plans for trade policies.

However, seasonally, belly, loin and sparerib prices should see some upward movement in the spring-summer of 2017 as we enter the grilling season. Surging pork exports provide support, but struggling pork cutout values are adding pressure and the USDA is forecasting 6 per cent more pork in the second quarter!

Moe Agostino, Chief commodity strategist
Moe Agostino is a chief commodity strategist with Farms.com Risk Management Inc.
For more information on managing risk in your grain and/or livestock operation, contact Moe at moe.agostino@farms.com or go to: www.riskmanagement.farms.com.

Abhinesh Gopal, Commodities analyst
Abhinesh Gopal is a commodities analyst with Farms.com Risk Management Inc.
For more information on managing risk in your grain and/or livestock operation, contact Abhinesh at abhinesh.gopal@farms.com or go to: www.riskmanagement.farms.com.