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Strong exports rescue US hog market

Strong exports rescue US hog market

Exports are seeing volume & value growth.

By Moe Agostino & Abhinesh Gopal of Risk Management; Photo by Jodie Aldred: The cost of raising US pigs in 2023 was 13 percent higher than in 2022 and 53 percent higher than in 2020.

Despite perceived US hog supply tightness—a feature of market expectations since the latter part of 2022—the 2023 hog market situation has not yet gone according to plan.

Looking at this year’s first quarter performance, lean hog futures were among the major livestock commodities that ended up being lower year-over-year (Y/Y), along with products such as pork cutouts and pork bellies.

On the other hand, cattle futures continued to be the best performers among livestock during the early part of the year as they continued to build upon their dominance from the past year. The strength of cattle futures underlines the strength of fundamentals in commodity markets. A tight supply outlook continues to underpin cattle futures, with little plans for expansion in the foreseeable future.

The hog market should also be seeing less supply, but perhaps the contraction is over.

The US Department of Agriculture (USDA) has yet to acknowledge a marketing hole and continues to revise past hog and pig report data to be higher.

The USDA’s March 2023 quarterly Hogs and Pigs report showed that the US hog herd had not increased much Y/Y, but they still made upward revisions to the prior reports’ estimates.

According to the USDA, the US inventory of all hogs and pigs as of March 1, 2023, was 72.9 million head. This was up slightly from March 1, 2022, but down two percent from December 1, 2022.

Breeding inventory at 6.13 million head was up slightly from last year’s numbers but down slightly from the previous quarter.

Market hog inventory at 66.7 million head was up slightly from 2022 but down two percent from last quarter.

The average cost of raising US pigs in February 2023 was 13 percent higher than the year prior and 53 percent higher than in 2020. Much of the increase was attributed to higher feed costs, which were up 19 percent from 2022—managing feed is critical.

The USDA stated that the revision made to the December 2022 all hog and pig inventory was an increase of +1.8 percent. A revision of +1.6 percent was made in the September 2022-November 2023 pig crop. The net revision made to September 2022 all hog and pig inventory was +0.4 percent, and a net revision of +1.5 percent was made to the June to August 2022 pig crop.

Higher-than-expected hog supplies available for weekly slaughter during the early part of the year have weighed on the hog cash market, which in turn has weighed on lean hog futures values.

Seasonally, the period from January 1 to the end of April can be tough, and 2023 is proving to be one of those years. Managing profits and risk at the futures peak in August 2022 was the prudent decision, not to wait and see.

Despite the variances in hog supply expectations, US export pork demand continues to remain buoyant, although US pork cutout values have been suppressed during the first quarter of the year and have yet to trade higher as they do in the spring.  

Seasonally, hog futures respond to strong spring-summer grilling demand by putting together a seasonal summer rally as supplies fall, which normally picks up steam around April 12 and peaks by end-June, end-July, or even end-August, depending on the year. In some years, the peak is early; in others, it can be later.

US pork exports remain the bright spot. The 2023 US pork exports have been higher by 12 percent Y/Y through the end of February. As was the case during the past two years, exports will need to save the industry’s bacon yet again. US pork exports are seeing both volume and value growth.

A standout feature among exports has been the strong pace of US pork variety meat exports to China.

The rebound in US exports to China is welcome news, along with strong exports to Mexico, the Philippines, and Taiwan.

A very weak domestic cash market and weak pork cutout values during the early part of 2023 were offset significantly by strong exports.

Lean hog futures contracts that expire in the summer or fall of 2023 are likely to derive strength from lower planned farrowing (this decides future near-term supply) in the USDA March 2023 Hogs and Pigs report for the March to May period, which was projected to be lower by -1.2 percent Y/Y and by -2.9 percent Y/Y for the June to August period.

Lean hog futures are famous for V-shaped recoveries and seasonal spring-summer demand. Lower supplies point to higher hog futures prices, back to a mean or average near $100 per hundredweight (CWT).

Export demand will need to be better than expected to make hog futures test or break above old highs at $106/CWT, as they have spent much of the first quarter of the year in or near technically oversold territory on the futures charts.

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