The Great Bacon Freak Out of 2017

By now, you've probably all seed the headlines: Now It’s Getting Serious: 2017 Could See a Bacon ShortageNation's bacon reserves hit 50-year low, and The Looming Disaster Of A US Bacon Shortage

As quickly as those headlines hit came another round of headlines proclaiming the original stories "fake news".  From the New York Times:  Bacon Shortage? Calm Down. It’s Fake News and USA Today: Bacon lovers, rest easy. You do not need to fear a shortage (coincidental, USA today also ran one of the initial stories hyping the issue before subsequently telling readers to "rest easy").  

Like so many issues, the truth is somewhere in the middle.  No, we're not going to run out of bacon.  However, it is true that bacon stocks (the amount of frozen bacon in storage) hit a 50 year low.  All the focus on storage is misplaced in my opinion.  What you really want to look at are prices.  Prices reflect scarcity relative to demand.  If bacon were really scarce, we'd expect bacon prices to rise because people would bid up the price to get their hands on the fewer supplies that remain.

Let's take a look at USDA data on wholesale pork prices (these are the so-called primal cutout values).  Below, I've plotted daily prices (cents per lb) for pork belly, and for comparison sake, the ratio of belly prices to pork loin prices from the first of 2014 to January 30, 2017.  

There has, indeed, been a dramatic increase in pork belly prices.  Prices increased from about $0.98/lb in November 2016 to now about $1.64/lb (a 67% increase).  However, as the graph also shows, this price point for bellies isn't unusual even in recent history.  Belly prices were at the same point or higher in the spring and then summer of 2014 and again in the summer of 2015.  The price swing in April and May of 2015 was much more dramatic than what we're currently seeing.  

Pork belly prices may rise and fall not because of scarcity of bellies per se but rather because of increases or decreases in overall pork supply.  As such, it is also useful to look at price ratios (i.e., are bellies in more demand than loins).  On this measure (the red dashed line in the above graph), bellies prices are higher than they've been in the past couple years: today pork belly prices are about 2.1 times higher than pork loin prices; back in late August, early September of 2015, the ratio was also high but only reached 2.07.

But, there is no fear that we'll run out of bacon in the short term. The pork industry is actually on pace to produce more pigs over the next year than it did last year.  Still, a hog can't be produced overnight.  So, how do we allocate a fixed supply of bacon in the short run?  That's the magic of the market.  Prices will adjust to ration out the supply that exists.  As such, the entire question that made he headlines was silly.  We shouldn't ask: will we run out?   But, rather: how high will prices go?