The pork industry is weighing its outlook as farmers balance between strong hog prices and rising input costs.
Farmers are enjoying some of the highest weekly hog prices since 2014, with domestic pork demand strong. Export values also hit a record, with producers receiving $61 in export value for hogs in 2021, according to U.S. trade data.
Yet producers are hesitant to expand herds, worried about rising input costs. The December quarterly hogs and pigs report highlighted producers at the time considered farrowing fractionally fewer sows in the first half of 2022 versus 2021.
The National Pork Producers Council (NPPC) says over the past 12 months, total costs rose 23.9%, with feed costs alone up 35.5%. Holly Cook, staff economist, NPPC, says farmers face the highest average cost of production in nearly a decade, with breakeven levels now over $80 a hundredweight.
Producers saw a record export value for hogs, but the volume of pork exported fell, says Daniel Roque, account executive at CIH Associates. The U.S. Department of Agriculture noted exports fell by 3% in 2021, and are projected to drop another 3% this year.
Domestic Consumer Demand Sizzles
Strong domestic consumer demand pushed wholesale hog and pork cutout prices higher, Cook says, but other factors added to the cost for retail pork prices. Pandemic-induced supply-chain issues, such as transportation issues and fuel costs, made it challenging to get pork to consumers.
Roque notes cold-storage supplies have fallen the last 10 years now, implying “that we are continuing to see very good demand from a domestic perspective.”
He expects hot demand would continue if pork prices are competitive in the meat counter. Yet the Bureau of Labor’s consumer price index showed a 15% increase in pork prices year-over-year, twice as fast as the U.S. inflation rate. That’s a significant jump as over the past 20 years. On average, pork rose 2% annually, Cook says. Comparatively, beef prices rose 18.6% and chicken prices gained 10.4%
“Retail pork prices took off in the last half of 2021, and remain elevated in 2022,” Cook says.
The summer grilling season is coming up, always an important time for pork demand. If hog prices continue higher, producers could enjoy strong margins, but much depends on input costs, Roque says.
Given the uncertainty surrounding input costs, Roque advocates producers protect their margins by using strategies to hedge feed costs. “If the last few years have taught us anything, we suggest also putting a floor underneath hog production as well. And as the open interest of the CME pork cutout has grown, we've also seen producers use those derivatives as well to mitigate their risk,” he says.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
