Scarce hogs reverse normal belly price trend in US

Scarce hogs and brisk bacon demand have pushed fresh pork belly values to near-record highs and bested related futures prices, which is contrary to what typically occurs during the winter belly storage period.

 

The current supply/demand dilemma is expected to persist into the summer when bacon demand is in full swing, and will likely result in higher year-over-year fresh and belly-futures prices, according to analysts and traders.

 

Bacon is made from pork bellies that are cut from the side of hogs. Bellies enter Chicago Mercantile Exchange-approved warehouses over the winter at a US$8-US$12 price premium to fresh or cash bellies to induce product storage for summer use.

 

Bellies are taken from storage around early July and augmented with fresh bellies. Frozen bellies are then sold at a discount to get end-users to pick them over fresh to satisfy bacon demand for the iconic BLT sandwich season.

 

BLTs' popularity, and bacon's use as a topping for everything from sandwiches to salads, helps drive cash bellies and their futures cousins to seasonal highs between late July and early September.

 

However, this year's belly storage cycle hit a snag after hog producers liquidated herds due to heavy profit losses tied to costly feed. The recession and last year's H1N1 fiasco curbed domestic and export pork demand.

 

Also, the number of hogs from Canada since the start of 2010 through mid-February slipped 18% as hog farmers there cope with some of the same production issues that plague their southern neighbours.

 

For five straight weeks through the week ending February 13, the exchange's weekly belly storage report showed bellies were withdrawn from warehouses when product is usually moved in.

 

CME's February pork belly contract expired from trading Tuesday (Feb 23) at 86.5 cents a pound. Widely used 14- to 16-pound fresh bellies were last quoted by the US government at US$90 per hundredweight.

 

"If the futures market is not carrying a premium during the winter-spring time frame, then there is no incentive for storage to occur," said CME livestock trader Dan Norcini.

 

In an effort to play catch-up to cash values, belly traders Friday (Feb 26) pushed futures up to the 300-point daily price limit. Spot-March, the new lead month, hit a high of 89.22 cents.

 

Bob Brown, an independent market analyst, pointed out that for the first four weeks in January, February CME bellies averaged 86.65 cents a pound versus 82.93 a year earlier. The fresh belly price during that same period on average was US$89.75 per hundredweight against US$72.06 a year ago, he said.

 

Citing numbers that date back to 1989, Brown said January's cash average price was the second highest for that time of year on record, which suggests belly users are scrambling for supplies and forced to rely on frozen bellies.

 

 

The US does not export a significant amount of bellies and bacon, so chances are the demand source is domestic in nature with the fast food sector probably the primary user, Brown said.

 

Norcini forecasts summer fresh belly values above US$100. Given higher CME lean hog futures versus a year ago, hog traders are anticipating reduced hog supplies this year and belly traders are operating under the same assumption, he said.