Bellies save their Bacon

There was a time when life was simple. The pig price was largely determined by the regular repeating cycles related to season of the year and the total number of productive females (the commodity cycle). If you are one of those producers who still thinks about price largely in terms of what has just been described, you are more than a little bit out of date. In the United States, pork prices have returned to what the market expected them to be clear back in January. Producers are making $40/head or more in profitability today and I can tell you they are both delighted and scratching their heads. The rather large increase in total production, the implementation of tariffs and the delay in opening of the third major new packing plant was leading to a lot of pessimism about the trajectory of pork prices and the worry beads came out when the typical summer seasonal was late in developing this spring.

As I pointed out in this column a few months ago (see April 2018, “Losses have arrived, but the fundamentals will bring the panic stricken back to reality”), when President Trump announced the likely implementation of tariffs on China and followed through with renegotiation of the North American Free Trade Agreements (NAFTA), an economic bullseye was drawn on countries which are some of the biggest export targets for US pork. The announcements in April and the reality in late May pretty much halted the expected summer price rise in its tracks. The reciprocal “punishment” aimed at Trump was targeted toward Agriculture in the US because Ag has a big voice in Washington, DC and can raise a clamor quickly and loudly when targeted. This was verified at World Pork Expo a couple of weeks ago when the Chief Agricultural Negotiator in the U.S. Trade Representative’s Office characterized pork as being at the “tip of the spear” in economic retaliation.

What changed? How come $40/head profit? The humble pork belly to the rescue! Just like last year at this same time, the belly price has increased from a low of about $0.82/lb. near the end of May (when tariffs were imposed) to the current price of $1.47/lb. Recall that last year it started the summer rise at the end of April at $1.05/lb. and breached an incredible $2.16/lb. in last July extending the summer seasonal well into late August/early September. This year, that’s a rise of over 70%. The other primal cuts (loin, picnic, butt, rib, ham etc.) undertook modest seasonal rises into summer over the same period this year in the range of only 8-12%. While US pork exports are above last year in total, the year-to-date trend appears to be drifting a bit lower (though exports typically drift down during the summer months when US prices reach their seasonal peaks). Stockpiling by Mexico and other countries ahead of the tariffs helped create a last-minute surge in April but gaming the price increase is now over.

The primal belly is about 16% of the typical carcass by weight in the US cutout (third in weight behind the loin and ham primals) but at this moment, it is the most valuable primal at 29% of total carcass value vs 19% for ham and 26% for the loin. This illustrates the current complexity of understanding pork prices. Clearly, the belly price now drives the carcass price in the United States more than most probably realize (see Figure 1 with inset correlation table). The belly price is nearly perfectly correlated with the carcass price on an annual basis in the US. Most other primals undergo their own annually repeating seasonal price movements typically related to seasonal demand patterns but their lower level of price correlation with carcass price illustrates that they can move up or down temporarily without always producing the same pattern in the carcass price. Not so for the belly.

Table 1. Correlations between primal cuts and carcass prices.

In addition, the belly (and the ribs) are largely consumed domestically with belly primal exports by weight making up just under 5% of US Pork exports. This powerful value component of the carcass (for the US) adds stability to US pork prices since it is not as subject to the risks of export loss, though it does undergo a widely swinging seasonal price pattern in the domestic market. US hog prices were possibly impacted by a shortage of cold storage due to the record production this spring. The booming US economy has created increased demand for everything from shipping containers, to long-haul trucks to cold storage. What cannot be moved or stored must be released to the market with price dampening impacts. Lots of balls in the air these days and lots of head scratching about what comes next.