COVID-19 shocks to the pork industry caused long-term backlogs and downward pressure on prices
By Jackie Clark
The evolving economic situation caused by the COVID-19 pandemic created the perfect storm to drive North American hog and pork prices downward.
“It’s been a bit of a roller-coaster in terms of prices and the goings-on in the industry since COVID-19 hit,” said Abhinesh Gopal, head of commodity research at Farms.com Risk Management.
Prior to the pandemic “hog prices were already dropping” due to market access issues, Gopal explained. At the onset of COVID-19 “there was that knee-jerk drop.”
At first it seemed as though hog markets may recover quickly from the initial drop in all markets because of the demand for meat. Though restaurants closed, there was a strong demand for meat in the retail sector.
“That led to a soaring cut-out value for pork,” Gopal said. “Cut-outs are wholesale prices. … If you have a soaring wholesale value, that leads to higher margins for the packer. Since the packer margins are strong, they demanded hogs.”
However, COVID-19 outbreaks among many processing and packing plants led to shutdowns.
“A lot of the hogs got backed up on the farms,” Gopal said. “That led to an oversupply of hogs and euthanasia of some of those hogs.”
That euthanasia is ongoing, and some experts predict it may continue until September.
“Because of the essential nature of the industry, the packing plants came back online fairly quickly, but nevertheless the disruption that happened led to quite a bit of backup,” Gopal said. The industry is still trying to clear backlogs.
Backlogs in the United States impact Canadian farmers directly if they ship hogs to the Midwest for processing, and indirectly through the closely tied markets.
Overall, “there was a recovery in prices due to that demand from the retail sector, but then the situation with the packing facilities closing down, that led to prices dropping again,” Gopal explained.
The U.S. Department of Agriculture’s quarterly hog and pig report showed a record inventory of hogs in the U.S., primarily market-ready hogs.
Not only is there a backup of pigs, but there’s more pork on those pigs.
“If you have hogs backed up on the farms … they get fatter. So when these animals now go for slaughter, they are big and heavy,” Gopal said. There is more pork production for a given hog slaughter, which also puts pressure on pork prices.
“Basically, you had more hogs and heavier hogs which was expected and caused futures to drop below recent supports,” Gopal explained.
“The good thing is, the economy is reopening,” he added. “Which also means demand from the hotel and restaurant sector is slowly coming back.”
Prices are starting to recover because the industry has confirmed numbers of hogs, which removes some uncertainty, plus demand is increasing as economies are opening back up.
Industry officials expect recovery to be slow.
“People are not encouraged to gather in big numbers. A lot of that group barbecuing and getting together and grilling is much more subdued,” Gopal said. However, as society opens back up “the summer demand will help.”
Export markets also provide “a bright spot as far as demand is concerned,” he added.
China has been purchasing pork from the United States.
“We need to convert that buying into actual shipments; we don’t want (China) to cancel. There’s still a big concern overhanging the trade deal between the U.S. and China. Nonetheless, Chinese buying is a relief,” Gopal said.
In summary, the three positive impetuses for recovery of hog markets are reopening of restaurants, strong retail demand, and Chinese buying.
Uncertainty still exists.
“There’s the fear of a second wave (of the pandemic) and also the increasing numbers of COVID cases. That (concern for safety) has caused a disruption or a pause in the reopening activities in the U.S.,” Gopal said.
However, “likely the worst is behind us,” he said. “Prices should improve from where we are, unless we get another COVID shock.”
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