Things are happening in the US industry which go against conventional thinking and previous patterns. When this happens, there is usually something unseen (by market watchers) that is working its way through the background. Eventually it will suddenly becomeclear with new data and markets will return to traditional patterns.
Consider that the US is producing more red meat of every category than at anytime in history. In the midst of this, the US pork industry is predicted by USDA Hogs and Pigs report at the close of 2016 to produce a 2-3% increase in production in 2017. Keep in mind we can get a big chunk of that increase simply from genetic progress and the continuation of the gradual movement of production to larger more sophisticated and systematic farms. So far year-to-date, that forecast is right on track.
After the plunge in hog prices in December 2016, the market made an unusual recovery to profitability and continues to trace an upward path which is faster than the five-year trend for this time of the year (which is generally up into the summer seasonal peak). A recent pause and pullback from new summer high price expectations has just been put in. What caused this unusual turn around in prices? It almost assuredly came from increased export activity.
This is leading to a big fear, now being openly expressed by pork industry officials in the US, that President Trump’s public face to Mexico and China may result in lower export sales for the coming year. Could it be that the early year turnaround in prices was due to stockpiling by countries concerned about the new U.S. president’s trade policies, especially Mexico? Trump has been critical of China primarily for restricting the full range of market based currency valuations. They are accused of only allowing it to adjust within a small range causing nearly constant incentives to import products from China but not to export there.
Mexico, the largest single buyer of US pork in the world community is in something of a turmoil regarding how to deal with the US President. Most U.S. packing plants and a large percentage of US Pork production at the farm level is carried out with Mexican and Central American labor. A wave of panic, should it get started, regarding immigration enforcement could cause significant disruption to the US pork chain. The Mexican peso was eroding in value against the US dollar throughout 2016, moving from the mid 16’s to the dollar to 21.3 to the dollar. On the day after the election it experienced a precipitous drop in value but over the weeks since the inauguration, the slide of the peso has stopped and it is retracing some of those losses closing recently at 19.6 to the dollar.
Part of the answer to why this upward trend in US prices continues despite record production can be gained from noting the substantial basis (difference) opening up between the classic premier primal cuts (loin and ham) and the bacon (or belly primal) plus the lean trim. Both the belly and the lean trim are up by double digits compared to last year while the loin and the ham primal remain stagnant.
Belly prices exceed the loin primal now in the wholesale market by twice and hams by three times. In addition, the supply of bellies in frozen storage reached an historic low this week causing tantalizing but unlikely headlines that the US will run out of bacon and/or have a national shortage. Prices at retail have nearly doubled in some cases for sliced bacon in one pound (0.45kg) packages in the last few weeks so you can count of the price mechanism to allocate supply and prevent an “outage”. Bacon has become so common as an add-on in the hotel, restaurant and institutional food markets that it now has a very strong, steady annual demand compared to a strong seasonal pattern years ago, which followed the old pattern of peak consumption in the summer months. Lots of changes, some behind the scenes and some anticipated are keeping the US pork industry in a bit of turmoil.