Pork Wrap October 15
The cutout was lower for the second week in a row, dropping $6
on a weekly average basis. The negotiated hog markets were
down less, losing only about $2/cwt. That caused packer margins
to compress about $5 on the week, now sitting just a hair below
$30/head. Further erosion in ham prices are largely responsible
for the decline in the cutout this week, although by the end of the
week, some of the retail items were starting to soften. That
leaves bellies as the sole item providing support to the cutout and
that primal could be just about to turn lower also.
This leaves the cutout at risk of falling below the $100 mark in the
near future. The breaking of that arbitrary, but psychologically
important barrier, could give pork buyers a reason to pull back
unless they have immediate needs. That said, there is no
guarantee that hams are going to continue to weaken. I’m calling
them a little lower next week, but then rallying into month’s end. If
the hams do indeed turn higher and the bellies continue to hold at
current levels, then there is a possibility that the sub-$100 cutout
could be delayed a bit. All of the buying for “pork month” is now
behind us and retailers will probably be looking to give beef a little
more ad space between now and Thanksgiving. That could leave
the retail items—loins, butts, ribs—taking a back seat as we move
into November. I don’t want to give the impression that pork
demand is not strong, because in a historical context it is very
strong.
However, the combined margin (chart below) took a significant
turn lower this week after only two weeks of strength. So the
previous two weeks are starting to look more like a head fake in an
overall downtrending demand environment. And maybe that is
how it will go as demand starts to cool after a year and a half of
super-strong demand. The overall trend could be lower, but it
may be punctuated with periodic strengthening episodes as one
primal or another catches fire for a brief period. Meanwhile, on
the supply side, kills are increasing seasonally and will continue to
do so for 6-8 more weeks. This week’s slaughter came in at 2.64
million head, including more than 250k on Saturday. That should
improve availability next week and is another reason why we might
see further losses in the cutout. The kill was very close to what
the pig crop implied for the second week in a row after several
weeks of running below what the pig crop projected.
Of course, the inventory numbers in the last Hogs and Pigs
report pointed to a 5.8% YOY reduction in weight categories
that will be slaughtered in late October and through November.
I don’t normally put a lot of faith in those inventory numbers,
preferring instead to track the pig crop through to slaughter.
This week’s kill was 3.3% below what looks like a very big
number from last year.
So right now, the supply of market hogs appears pretty ample.
That could change, but I’ve never seen the hog supply get
really tight in Nov/Dec. It just doesn’t happen. Detectable
tightness in supply might start to surface around the holidays
and into January as the industry starts working on the Jun/Aug
pig crop, which was reported down 6% YOY. Between now and
then however, I look for hog supplies to be plenty adequate.
The price that packers pay for negotiated hogs was under less
pressure this week than it has been in earlier weeks, but I really
don’t expect to see negotiated prices turn upward and march
higher at this time of year. Packers will likely struggle to push
all of the market ready hogs through the plant this fall, given
their labor issues and so I don’t see them having much
incentive to chase after negotiated hogs. The futures curve for
hogs pressed lower this week, with the biggest losses coming
in the front end of the curve.
The market was led lower by the expiring Oct contract, which
will cash settle at $87.60 on Monday. At expiration time on
Thursday, the final trades were done at $88.20, so someone
left a lot of money on the table. There were 9,300 Oct contracts
left open at expiration that will cash settle. The gap between
the last trade price and the cash settlement price amounts to
$2.2 million that will be transferred from the open longs to the
open shorts next week. This expiration was one of the six
worst misses since cash settlement was instituted for lean hogs
back in 1997 (chart below). Next week, look for the hams to
finally find a bottom and turn higher. That may just about the
same time that the bellies decide to break lower.
