Pork Wrap December 24
The hog and pork complex experienced another steady week. The
negotiated markets were essentially unchanged from the week before
and the cutout averaged $0.65 lower than the week before. In the
midst of this uneventful week in the cash markets, the Feb futures
saw fit to rally almost $2.50 and is now trading close to $12 over the
current LHI. That seems excessively wide. Are traders trying to tell
us something? The surge of bullishness in the futures could very well
be related to the escalating risk posed by the omicron variant and
traders may be saying that they would rather be long than short if
packing plants have to reduce production due to absenteeism
spawned by COVID infections. Hog futures react differently than
cattle futures to production restrictions because the cutout plays a big
role in hog pricing.
Production slowdowns will raise cutout values and thus also likely
raise the LHI. Any such slowdowns would certainly cause the hog
production pipeline to back up and reduce the price of negotiated
cash hogs, but the positive influence from the cutout on hog pricing
often overwhelms the negative effect from cash hog markets. There
also seems to be a general sense that pork demand is about to enter
into another upcycle and take prices higher. That is what the
combined margin has been pointing to, however this week it ticked a
little lower. It is definitely in the zone where it normally turns higher,
so it is natural to assume that the next move in pork will be up.
Futures traders will spend the holiday weekend digesting Thursday’s
Hogs and Pigs report. That report didn’t contain a lot of surprises, so
the market impact may be minimal. USDA reported the total swine
herd about 0.6% lower than what analysts were looking for, so that
might be considered mildly bullish. However, the breeding herd was
dead-on with the average trade guess and the breeding herd is the
engine that powers future hog supplies. The Sep/Nov pig crop was
estimated down 2.6% before USDA revised last year’s Sep/Nov pig
crop estimate upward. After that change, the pig crop was down
3.6%.
The revision to past numbers makes absolutely no difference to how
many pigs are on the ground right now. It only affects people’s
perception when they view the percentage change. The average
trade guess was for the Sep/Nov pig crop to be down 2.8%, so the
reported number was actually 0.2% larger than what analysts were
expecting. That should be mostly neutral to the market. The number
of pigs saved per litter bounced back up in the most recent quarter
and if producers can maintain the growth in that important productivity
measure, it would allow them to get more market hogs out of the
same sow base than what we’ve seen in the past few quarters. In all,
I think the H&P report shouldn’t be a big market mover on Monday.
The numbers were a little smaller than what I had dialed in, so
when I included the new data it raised my 2022 price forecasts
slightly. This week, it was gains in the retail items that supported
the cutout while the hams and bellies exerted downward pressure
on the cutout. In the end, it was almost a wash and the cutout
remains stuck in the mid $80s. If packers experience increased
absenteeism as COVID cases increase, then we might well expect
to see more day-to-day volatility in the pork cutout. It already
gyrates wildly depending upon what proportion of the ham volume
was boneless on any given day.
Further labor tightening will increase boneless product pricing
relative to the bone-in and thus make the swings even bigger on
days when the boneless buyers are active. The forecast over the
next few weeks has all of the retail items working higher and some
modest increases in belly pricing. Hams will likely be the laggard,
but by the middle of January they could be strengthening as well.
Trim markets also appear to be poised for increases in January.
This week packer margins averaged about $28/head, down $4 from
the week before. I see margins stabilizing in the high $20s/low
$30s over the next month or so before they start to move below $20
in February. I’m expecting packers to only do a modest kill on
Christmas Eve and zero on Saturday to put the weekly total
somewhere close to 2.05 million head. Next week, 2.2 million is
expected and when we return to full production in the first week of
January, kills should be around 2.5 million head or slightly higher.
So far, the industry has over-killed USDA’s estimate of the summer
pig crop and that trend should continue in January unless covidrelated slowdowns disrupt harvest facilities. Hog carcass weights
are at their seasonal high point now, but pretty close to what was
expected.
It looks like the hog pipeline is filled, but not backed up. Export
demand still looks pretty weak compared to last year as China is
only buying a fraction of what they did last year at this time. I think
that is one of the things that has hog producers cautious about
expanding. The prospect of persistently high corn prices is
another. Futures corn traded over $6/bushel this week and we
haven’t even entered the season where traders normally start to
build in a risk premium for concerns about the next crop. With all
of the volatile weather around the globe, there will almost certainly
be floods, droughts, wind storms or some other phenomenon this
spring that will cause traders to bid up corn futures further. Next
week watch the news on COVID infections and the public’s reaction
to soaring case counts. That is the most important feature in this
market right now
