Pork Wraps

This week the pork cutout added a little over $2 on a weekly average
basis and the WCB negotiated market added a little under $2. So, the
markets are still working higher—no change there. Packer margins
increased a tad to $18.20/hd. All of the same supply/demand dynamics
that have been in play for the last few weeks—tightening supply, strong
demand—remained in place this week. This swine kill came in at 2.49
million head, with packers using a big Saturday kill to offset a very soft
kill on the Monday following Easter. That kill was a little larger than
what the pig crop suggested (chart to right), but not by a lot. As of right
now, the cumulative over/under kill for this quarter is very close to zero,
so there is no reason to think that the USDA survey got the pig crop
wrong. Barrow and gilt carcass weights remained flat at 215 (+2
pounds YOY) in this week’s data, so no surprises there. The supply
side of this market is behaving as expected.

It is the demand side that is causing all of the fireworks. Further, it is
domestic demand that is driving prices higher, not surging international
demand. This week USDA released trade data that showed pork
exports in February were down 10.1% YOY. That was expected, since
the weekly data has been running consistently below year ago since the
beginning of 2021. So, if the price strength isn’t being driven by a
supply restriction and it isn’t being driven by strong export demand, then
there is only one possible culprit left: domestic demand. The combined
margin chart to the right shows a pretty strong move higher this week after looking like it might be trying to peak last week. Recently, I’ve said that this market reminds me a lot of the Atkins Diet fad back in the early
2000s and the longer this demand strength goes on the more it
resembles that market situation. If it is true that some shift in the
public’s dietary patterns has occurred and that shift causes them to
demand more animal protein, then this demand strength could last for a
long time. In that situation, what I think we would see on the combined
margin chart is a long, relatively sideways pattern start to develop. You
can see from the chart to the right that the combined margin has rarely
plateaued. It is almost always going either up or down. It is worth
keeping an eye out for that.

One thing that makes me think that this is something different from the
many demand cycles we have seen in the past is that it seem to be
affecting all of the animal proteins at the same time. A big part of what
drives normal demand cycles in retailers switching from a relatively
pricey protein to a more attractively priced one. So, it is not very
common to have all of the protein demands in an strong upcycle at the
same time. When they do all show strength at the same time, it makes
me think there is something beyond the normal retailer-driven cycle
going on.

Another thing that would impact the demand of all proteins in
relatively the same way at the same time, is growth in consumer
disposable income. Three rounds of stimulus checks have been
sent to US consumers in the past year and so it is also possible
that this demand surge is being driven by stimulus money.
However, pork demand started strengthening way before the most
recent (and largest) stimulus checks were issued. I have to think
that the stimulus payments are helping this demand cycle along,
even if they are not the primary cause of it. The other things that
get mentioned but I don’t really think are doing much to boost
demand are:

1) Increased vaccination rates causing an increase in consumer
confidence and thus spending and,
2) Increased foodservice demand as the economy reopens.

The latter seems to be the one that gets the most attention and I
will grant that there could have been a modest demand pressure
from foodservice operations rebuilding inventories in anticipation
of reopening, but that rebuilding of inventories is a one-time event
and once that is done then meat sales at foodservice takes away
from sales at retail and any demand strength created shouldn’t
persist. Further, the demand index data indicates that red meat
demand improved during the pandemic compared to where it was
prior. If that was due to the shift in consumption from the
foodservice channel to the retail channel, then movement back in
the other direction should be negative for meat demand.

At this point I’m leaning strongly toward either a dietary shift or
stimulus money, or both, driving this demand shift. Understanding
the cause of a demand shift is important because it will help us to
better gauge how long it will last. The futures market thinks it will
last for quite a long time given the way it has priced the summer
and fall contracts. My fundamental forecast is not as generous,
but I’m assuming that this demand cycle will turn lower in a
reasonable time frame like all the others before it. If something
structural has changed (like dietary patterns) then the fundamental
forecasts will likely prove too low. Next week, watch the daily
demand scatters since those will give the first indication if demand
were to soften, but remember that it takes several consecutive
down days to confirm the trend has turned.