Pork Wraps

The Dec LH futures cash settled on Tuesday to a LHI of $72.30. At the
end of the week, the LHI was still very close to that level. The Feb
futures, which are now the nearby, moved lower the first three days of
the week, but then rebounded on Thursday and Friday to finish the
week almost unchanged. The thing that seemed to change trader’s
minds midweek, was the cutout printing in the high $80s and low $90s.
However, that was mostly an artifact of some boneless ham volume
that was spread out over more days than normal. By the end of the
week, the cutout was back below $86. There was also a sense that
the negotiated hog market was moving higher, but in actuality the WCB
market averaged $1.26 less than the week before and the NDD was
only $0.25 higher. This just highlights the difficulty that traders are
having figuring out a market that doesn’t seem to have a discernible
trend. The cutout has been stuck in the $80s for five weeks now, and
my forecast has it holding in the $80s for another 3-4 weeks. Some of
the weekday kills were smaller than expected this week and perhaps
that gave the impression that packers were having difficulty finding
hogs.

However, they didn’t have any trouble finding enough hogs to generate
a huge 332k Saturday kill. That put the weekly total at 2.65 million
head and was only a hair shy of the biggest kill this fall. The kill was
only down 4% YOY—well above the 6% smaller kills that USDA
indicated with its summer pig crop estimate. The chart below shows
that we’ve over-killed the pig crop every week so far in this quarter and
next week the over-kill is expected to be even larger as a result of the
way that Christmas falls on a Saturday this year. I haven’t found a
good explanation for the small weekday kills we saw, but the
windstorms in the Midwest this week may have played a role.
Hopefully, it wasn’t COVID-related absenteeism, but that is something
that could emerge as an important factor in the weeks ahead. Buyers
should be prepared for the possibility that this more-infectious variant
causes reduced production as workers come back from the Christmas
holiday

Next week, the Saturday kill will be zero and the Friday kill is likely to
be reduced. I’m expecting the weekly total to be only 2.07 million head.
In the week leading up to New Year’s, I have the kill closer to 2.2
million head. It is possible that the short production in the next two
weeks will produce some gains in the cutout, but that typically doesn’t
happen because everyone knows it is coming and prepares for it. This
week, it was the hams that provided the most support to the cutout and
that is a little unusual because normally the hams are breaking lower at
this point in the calendar. It does look like packers sold forward a big
order of hams recently and negotiated volumes of bone-in hams were
unusually low, so perhaps that was limiting availability. My guess is
that their ham inventory will be replenished by the huge Saturday kill
and hams will come out of the gate next week trading lower.

Bellies have been stagnant as expected, with the primal holding
near $130 for the past few weeks. I don’t see them moving much in
either direction until after the holidays when they could see some
modest price gains. Other than that, I have most of the other primals
in a sideways pattern until mid-January and that is what leads me to
a cutout that holds in the $80s for the next few weeks. Packer
margins improved about $5/head to $32 this week and, while that
isn’t anywhere near the record for this time of year ($43/head), it
certainly doesn’t seem to be consistent with the very tight hog supply
scenario that many have been anticipating. USDA will release
another issue of Hogs & Pigs on Thursday and I expect it to show
the swine herd down a little over 3% YOY and the near-term hog
supply about 4% below last year. The most important number will
be the estimate of the Sep/Nov pig crop and there I’m looking for a
3.2% YOY decline.

Those will be the hogs coming to market in the March/May quarter,
so its reasonable to expect both hog supplies and pork production to
be below year-ago levels at least through the first half of 2022. With
smaller supply being likely, the focus will turn to demand for price
determination and in particular export demand. China continues to
pull back from the US pork market and there is little reason to think
that will change in early 2022. That will leave a big hole to fill
because the China business was very strong in early 2021. Mexico
has been stepping up as a bigger buyer lately and that has helped to
temper the influence of dwindling Chinese business, but it won’t be
able to fully replace it. As a result, I’m projecting significant YOY
declines in pork exports for most of the first half of next year. It
won’t be enough to offset the smaller production in Q1 and thus per
capita availability could be down 5% or more through March, but by
Q2 we could have availability back near 2021 levels. Domestic pork
demand appears to be turning higher, albeit slowly.

The combined margin chart below makes it pretty clear that a bottom
has been established. This is the first bottom in negative territory
since the pandemic began. My guess is that the next peak in the
combined margin will be well below what we saw in the pandemic
also. So we have all of the elements for some price appreciation in
both hogs and pork, but the increases may be very small initially and
then gain more traction around the middle of January. There is risk
however, that the omicron variant will disrupt production and send
prices sharply higher. From what I know right now, I’d put the odds
of that kind of event at 1 in 4, so it’s not insignificant. Next week,
watch the hams for signs that the seasonal price break is taking hold
and watch the news closely for reports of escalating omicron
infections in or near packing plants.