Pork Wraps

Pork packer margins expanded to $25/head this week as hog prices
continued to fall and the pork cutout managed to hold steady. The
negotiated hog markets were $5-6 lower on a weekly average basis
and the cutout was lower through Thursday and then a sharp bump
higher on Friday moved the weekly average about $0.85 over last
week’s average. Is this a turning point for hog and pork prices? That
is the question on everyone’s mind. My answer to that is probably not.
Pork demand has indeed been very good and we are now starting to
see some price increases in the ham and belly primals, but that is
being largely offset by weakness in the retail primals (chart below).

I think the deciding factor on which direction the cutout goes from here
will come down to hog slaughter and thus pork production. This
week’s kill came in at 2.58 million head, only slightly below what the
prior pig crop indicated and there will be further growth in the weeks
ahead. Packers had some issues at plants early this week and we
saw the daily kills revised downward on Monday through Wednesday.
I think that shorted the market temporarily and helped keep price levels
from being pressured. However, packers did a big Saturday kill (232k)
and that will more than make up for the production that was lost early in
the week. That pork will need to find a home next week. That might be
expected to drive prices lower. However, there are two things that
might work in favor of higher prices. The first was a very sharp rally
near the close today in the Oct futures.

That sends a signal to pork buyers that the October market may well
be stronger than expected and it could cause some buyers to scramble
for coverage and thus bid up pork prices. The other thing is the Hogs
and Pigs report released today. The data reported by USDA from their
quarterly survey was very bullish. There will likely be a substantial rally
in those futures on Monday and they may even trade limit-up. That
also may freak buyers out who have been sitting on the sidelines
watching pork prices fall for the last few weeks. Those two things and
the impact that they have on buyer psychology might outweigh the
effect of next week’s larger production and thus push the cutout higher.
Speaking of the Hogs and Pigs report, the numbers that USDA
revealed today were solidly below the average trade guess in almost
all categories and even more below what I was carrying prior to the
report. Replacing my pre-report estimates with USDA’s numbers
caused a substantial downward revision in hog and pork supplies
going forward.

The most important number in today’s report was the Jun/Aug pig
crop, which are the hogs that will be slaughtered in the Dec/Feb
quarter. That pig crop was reported down 4% from last year. The
number of sows farrowing last summer was reported to be
extremely low in a historical context. One might surmise that
PRRS was much worse than thought last summer and thus far
more sows aborted litters than expected. I don’t really know what
was the cause of the very low farrowing percentage number, but
disease is a likely suspect. For pork buyers, that means that this
winter’s pork supply is going to be tighter than we expected. USDA
did revise the prior Dec/Feb pig crop lower by 1.3 million head,
acknowledging the miss that became obvious to us this summer
when kills fell well below what was expected.

Nothing in USDA’s numbers will affect supply for the October
contract, which expires in three weeks. In fact, USDA reported
near-term hog supplies just a little larger than what the analyst
community expected. Pork demand has been easing in recent
weeks, but this week the combined margin showed a slight uptick.
It is probably too early to declare the current demand downcycle
dead because these kinds of head fakes are common. This
afternoon’s cutout printed over $110 and to the casual observer
who has been seeing the cutout in the $103-106 area earlier this
week, it may appear like the start of a new upcycle in demand.
However, today’s cutout strength is more a function of the particular
mix of items that were sold and it will likely revert to the $103-106
range on Monday.

That is, unless buyers panicked by Friday’s rally rush into the
market on Monday. Lest it seem like all the news is bullish, I
remind readers that the export numbers to China have been terrible
lately and hog and pork prices in that country are very depressed.
That probably means depressed exports out of the US in Q4 and
more pork that needs to be consumed domestically. Beef prices
are also declining rapidly and that should soon begin to shift retail
interest away from pork. Next week, watch the cutout for signs
that buyers are rushing to get coverage since that could signal a
psychological shift that might very well turn the pork market higher.
At least for a little while.