Changes to the USDA’s pork production forecast in January were minimal, following the December inventory report. 1st quarter production was fractionally lowered by 30 Mil Lbs, while the 2nd quarter forecast was increased by 50 million. The US pork industry is expected to produce a record large 6,440 million pounds of pork in the Apr-Jun time frame, 5% increase over lst year, and the 4th consecutive year over year increase for that quarter. And while production expands significantly, the USDA has US exports to hold almost unchanged from last year. The chart shows the USDA’s estimate for 2nd quarter per capita pork disappearance, which is forecast at 106% of a year ago, and the largest since 2004. At the same time, the CME is valuing 2nd quarter hog production nearly 3% higher than 2017 at $72, which also suggests a significant increase in demand.
The January beef production estimates featured an 80 Mil Lb increase for the 1st quarter to an 18 year high, while the 2nd quarter forecast was up 150 Mil Lbs from December to a record large 7,070 Mil Lbs. If realized, this will be huge 10% increase in 2nd quarter production versus a year ago. Beef exports are forecast to be up 7% and also record large, while imports are expected to decline fractionally. However the change in net beef trade will not come close to offsetting the increase in production. Per capita beef disappearance (supply) is expected to jump 1.2 Lbs (8%) from last year in the Apr-Jun time frame, which if realized will be the largest year over year increase of the last several decades.
Based on the record large increase in quarterly per capita disappearance, the price model in the chart projects a quarter average 5 area steer price of $101. The USDA’s own price forecast in January called for 2nd quarter 5 area average steer price in a wide range of $115-123 versus last year’s average of $133, while the CME this week is offering hedgers an average of $122.
Strong US red meat demand has clearly been uncovered in the last 6 months as the US economy grows. Our view is not as bearish as the price model projects, but the supply/price relationship suggests that the markets are already suggesting very strong demand for the upcoming quarter, and that price risks are likely to the downside, not up. We continue to advise 2nd quarter cattle sales on strong rallies.
