2017: A Wild Ride for Pork Bellies & Bacon

It is no secret that the belly and bacon markets made waves last year. When bacon makes the news, people listen, especially when that news contains attention grabbing catchphrases like “Bacon Apocalypse.” The beloved processed pork product is a jack-of-all-trades; its enjoyed in retail and food service, on its own, alongside another protein, wrapped around another protein or even used to make vegetables more flavorful. Last year, the threat of high prices for bacon raised the public’s collective eyebrow, while the threat of an all-out shortage shook Americans to their core! (OK perhaps that was a bit hyperbolic).

So, what happened? Will it happen again? Can you rest easy knowing that tomorrow when the sun rises, bacon will be there to kick start your day? Let’s examine some of the events of the past 12 to 18 months and investigate some of the short and long-term effects of the record-breaking year that was 2017.

Quickly, we need to travel back to 2016 to look at the cold storage situation for bellies. Cold storage is critical in the belly market because it is used annually as a safety net during the high demand periods of the year to compensate for a shortfall in fresh belly production. The USDA’s December 2016 cold storage report showed that this was the lowest December figure on record for bellies in cold storage. Prior to 2016, we have never had a year where the December figure was lower than November. Also prior to 2016, only once (1977) had we seen a year where November was lower than October. Therefore, we had been using all the fresh product produced, PLUS additional frozen product since May. We are not typically in a net-withdrawal state, in terms of freezer inventories, after October.

This shortage of bellies in cold storage at the end of 2016 meant that 2017 could start off with fireworks, and it certainly did. The low prices that 2016 ended on created a swell of buying interest. There was also the imperative need to sell bellies into the freezer to avoid a crisis in the summer. A bullish trend began almost immediately after the calendar flipped to 2017 and culminated with a February peak that exceeded every summer high on record and was second only to a price reached in April 2014 during the mammoth PEDv rally. After a decline that lasted from February to May, the value of bellies began their seasonal summer upswing, ending in July with a fresh record high.

Bellies and bacon move together, but on a delay. Due to the nature of the bacon market - the further processing time required, large purchasing contracts etc - bacon prices tend to lag that of bellies. For instance, while the price of bellies peaked in February and then again in July on the spot market, retail bacon prices saw their respective peaks in April and September. Regardless of when it happened, bacon just like bellies set new all-time highs in 2017. Was it an “apocalypse”? No. Were consumers and restaurants paying more than ever for the crispy strips of pork? Most likely yes.

Prices were higher than ever and domestic supplies were running on fumes so some industry participants had to look elsewhere to fulfill their needs. This is where imports enter the picture. Poland may not be the first name that comes to mind when you think bellies or bacon but it was a substantial increase in imports from Poland which kept the bacon machines running for some participants. In 2016, imports from Poland labeled as either bellies or bacon totaled approximately 42.8 million pounds. The next highest provider of belly/bacon goods was Denmark with a total of less than a third of Poland’s contribution. While 2016 was a big year for Polish bellies, it paled in comparison to 2017. At nearly 87 million pounds, the U.S. more than doubled the purchases of bellies and bacon from the eastern European nation in 2017. We also saw countries that had no presence in 2016 begin to sell bacon/belly products into the U.S. in 2017 including France, Italy, South Korea and Trinidad and Tobago, although all with very small volumes.

So where does this leave us in 2018?

First, cold storage stocks were much improved compared to 2016-2017 as we transitioned into the new year. As you can see in chart 1, while 2017 included some of the lowest figures ever recorded during the first half of the year, the industry steadily built inventories every month from July forward. We transitioned into 2018 with December cold storage stocks 120% higher than the previous year.

Second, business lost can be difficult to reclaim when we are talking about imports. Countries such as Poland gained a more significant foothold than ever before in 2017, and it is the human way to remember and continue to do business with those which got you out of a predicament. Albeit a small portion of the overall belly/bacon business, some market share was likely lost to the countries which supplied product when there was little to no extra availability domestically. Therefore, it is not hard to imagine that imports of bellies will continue to be something worth monitoring moving forward.

Lastly, price. At the time of writing this article, the price action of bellies has been eerily like that of last year with a strong rally right out of the gate. This week we have seen push back from buyers at the elevated price levels result in a sell off (not depicted in the chart). Moving forward, with more than twice the product in cold storage compared to 2017, one would think that we have a bit more of a safety net in preventing price extremes. However, there is still a large need to sell even more bellies to the freezer in preparation for Summer demand. In addition, with several new plants that opened their doors last year, pork production is expected to continue to expand year-over-year. It should not be forgotten though that production was also at records last year and we saw what happened to the price of bellies.

Bacon continues to grow in popularity every year. Demand domestically and abroad has shown little sign of slowing, which makes price prediction extremely difficult. Will an increase in pork production and continued growth in pork imports tame the belly market or will the world’s seemingly insatiable hunger for bacon push prices to new highs? Only time will tell. I suggest you have a slice of bacon while you wait.  

You can find this analysis and many more on Urner Barry's premier online platform for red meat, poultry, eggs and seafood: Comtell. Find out more about Comtell HERE!