Pork Wraps

Uh-oh, here we go again. After several weeks of trending lower,
the cutout posted a $1.65 increase this week. We have seen this
behavior before. The chart below shows the LHI and nearby
futures between the Aug and Oct expirations. Here the index was
in a steady downtrend until about Sept 20, when some transitory
gains in the cutout turned the index higher for a couple of weeks.
It eventually resumed its downtrend. Back in September, this
event forced the futures to rally since it had been carrying a
discount to the index. The same thing appears to be happening
now.

Modest gains in both the bellies and hams this week combined
with a surprise surge in picnic prices to push the cutout back up
into the high $90s. The strength could be associated with last
week’s relatively light kill, but it has certainly changed the
complexion in the futures market. The Dec contract moved lower
today, but is still only $2.40 under the LHI. I’ve had to revise
forecasts higher in response to this development and now have
the cutout forecast holding in the high $90s for three more weeks.
Because the hams and bellies both seem to be in an upcycle at
the same time, I wouldn’t rule out cutouts in the low $100s at some
point. This is all likely to be transitory, just like back in September,
but for the next couple of weeks it could provide a lot of support to
cutout and the nearby futures. The retail cuts seem to be holding
in a sideways pattern, so it will likely come down to the hams and
bellies for cutout direction in the near-term. Hams are clearly
strengthening now and this is the third week of increasing ham
prices.

The chart below shows that I’m only expecting another week or
two of stronger ham prices before they turn lower again. There is
some risk to that forecast, however. The hams are recovering
from their lowest price of the year and the primal has spent much
of 2021 in the $80-100 range. My forecast has the primal topping
out around $75 and that may be too low. If the ham primal runs
back above the $80 level then I think that will almost guarantee
that the cutout moves back above $100. Hams have a well
known seasonal tendency to break in mid-December. I’m looking
for them to break in mid-November this year, so I might be too
early on that. The bellies, on the other hand, have just begun to
move higher, so they could be a bigger source of support for the
cutout over the next few weeks. I’m projecting the belly primal to
top just over $180 in early December.

That would be the 5th belly primal top this year. The other tops
have been above $200, so I might be a little too conservative on
this one, but it is my sense that bellies don’t typically outperform
in the latter weeks of the year. Of course the factor that will
work against these two important upcycles is the fact that kills
are near the largest of the year. This week’s total was 2.61
million head, with a larger Saturday than last week. Even so,
the kill was below what the pig crop projected once again.
With 3 weeks to go in the Sep/Nov quarter, slaughter has
underperformed the pig crop by about 500,000 head. I’m
projecting next week’s kill at 2.65 million head and that may be
the fall top.

When December arrives the industry will start working on the
Jun/Aug pig crop, which was reported down 6%. So we are
getting pretty close to the point in the calendar where pork
production will turn lower and of course there are 3 major
holiday disruptions between now and the end of the year that
will also restrict production. Negotiated hog markets finished
the week about $2 lower than where they closed last Friday.
Packer margins swelled about $9 to $35 this week. So far,
negotiated hog prices and packer margins don’t suggest that
labor problems are limiting the kill. Outside of the short-term
strength projected in the bellies and hams, I do think that
overall pork demand is going to be leaking lower as we close
out the year although it might not show up in prices strongly
because of supply tapering during December.

I’d expect the demand softening to become more obvious after
the holidays, but even then it could be masked somewhat by
that 6% smaller pig crop that the industry will be slaughtering.
USDA released official export numbers for September today
and they pegged total pork exports down 6.4% from last year.
The YOY comparisons will likely only get worse in the final
three months of the year because China has a much smaller
appetite for US pork than it did at this time last year. Next
week, watch for the cutout to flirt with the $100 mark again if the
hams and bellies can maintain their upward trajectory.