July LH soared over $19 from recent lows to recent highs from an island bottom on the charts. The most shocking surprising thing to me about that was that it could rally $19 and both packers and hog producers were still losing money despite such a price recovery.

On June 12, the standard packer margin was a negative $19.87 a head and the integrated packers that produce their hogs were losing $23.23 a head.

That is a considerable improvement over previous losses but a lot of water continues to leak from the bottom of the pork industry equity bucket.

The summer hog market is typically the most profitable of the year and it is an extremely rare situation when it is a total bust. It will take more than just a bounce from oversold conditions to restore the profitability of this industry.

Wholesale pork prices are very cheap but retailers are using pork as their profit center maintaining high retail margins. Beef is expensive so they are not making much on that. This market has all been about weak demand and the way that gets fixed is to lower retail prices. Retailers have been reluctant to cooperate.

The pork demand problems are not going away easily. Pork exports have actually been good, up 15% in sales over April a year ago (nearly 9% larger year to date). All that does is highlight how bad our domestic demand issues must be. Much of U.S. pork is shipped from the West Coast from the ports now being impacted by potential labor issues. Ironically, state regulations such as Proposition 12 or Question 3 are non-tariff trade issues and under USMCA rules could not be enforced by USDA on Canada. Maybe Canadian pork imports have access to our market that we ourselves are blocked from supplying?

Pork demand is about to get much worse in two states, California and Massachusetts, because of restrictions on production practices that are being enforced on hog producers for pork to be sold in their states. California Prop 12 restrictions and Massachusetts Question 3 regulations go into effect next month. Pork sold in California has to be pre-certified as having been produced under “human practices'” outlining how sows are handled. Massachusetts Question 3 is similar but goes even further by barring pork that doesn’t meet their humane standards from even traversing the state. The NPPC says that $2 billion worth of U.S. pork passes through Massachusetts, which we would have never guessed. I would expect there will be a significant logistics change to avoid shipping pork through that state.

Only 5-8% of U.S. pork is produced in facilities that meet these two states’ standards while they represent 17% of pork expenditures …or did. They will not any more. It would take $300-$350 million in new investment to rebuild enough of the nation’s sow facilities to meet their standards. NPPC says the investment would be $3,500 per sow.

It could not happen in a timeframe quickly enough to avoid the huge market disruption that is most certainly coming. Pork coming into California has to be certified as meeting their standards and until the process is implemented, no one knows for sure what it is. Reportedly, pork in California prior to July 1 beats the clock and will not require certification to be sold. It starts out as self-certification but will require third-party certification for compliance by January 2024.

Given the enormity of losses and demand disruption, industry liquidation is already occurring. All producers have operations that are more efficient than others and the bottom end of the sow herd is going to get put on trucks after the litters are weaned. This includes the big producers like Smithfield foods, which is reportedly liquidating its Missouri sow herd. Liquidation likely begins with reduced gilt retention. There is a hog report due for release at the end of this month, which may give an inkling of what is coming, but it will be the September hog report that confirms the liquidation.

Pork demand shrinks and the price of pork declines and the result is a major financial threat to the hog industry that no one is able to hide from. Pork demand has been so bad that even non-integrated standard packers can’t make money from cheap hogs. Feed costs are coming down but even a dollar bushel off of the price of corn would not produce a profit yet either.

As a corn producer, I am concerned what this will do to 2024 corn feed demand as smaller cattle and sow herds will trickle down to weakening feed use. The duration of the losses, expected to continue, are well depicted in the ISU profit data.

This is not the first hog industry shakeout which has taken place before, but it is the stupidest. Retailers have not been featuring pork with weekly features running 70% below a year ago. Retailers were doing less featuring than usual for Memorial Day and ended them abruptly thereafter as they were trying retain more margin.

Eventually, after supply adjusts or over-adjusts to demand, we are going to see pork and hog prices soar again. It should be a bullish 2024 for the hog market as the last of the pigs from liquidated sows reach market.

This is not the kind of roller-coaster feast or famine-type market that sustains a healthy industry. The integrated nature of the industry should reduce the amount of time that it takes to adjust supply to demand. Smaller producers will suffer first and most, but integration did not protect those integrated packers from losses.

This was not about short shackle space. This truck hit the pork industry from the demand side.

David Kruse is author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet. CommStock Investments is a registered CTA, as well as an introducing brokerage.