Pork Wrap January 28
The pork cutout continued its upward momentum this week, adding
$3.43 to average $95.46. Retail items, and in particular the loins,
were the big driver of this week’s gains, along with some help from
the bellies. That fits with the idea that surging covid infections
would force consumers back into stay-at-home mode and drive
strong demand at retail. For once, the hams were not the main
focus. The big story this week was the rapid rise in cash hog
prices. Negotiated prices in the WCB rose $8.55 this week and the
NDD price was up $5.44 on a weekly average basis. This caught a
lot of people off guard because the narrative had been that labor
problems in the plants were slowing kills and thus hogs should have
been backing up to some degree. Well, apparently not. First of all,
the hog kills never really got that small. The chart below compares
each week’s kill to what the Jun/Aug pig crop implied. From Dec 1
through New Year’s week, the industry actually over-killed the pig
crop.
Then there were two weeks of mild under-killing that I would
attribute to absenteeism in the plants. This week’s kill came in at
2.55 million head, which was about 145k over the pig crop
projection. So now we are back to over-killing the reported hog
supply again and I’m forecasting an over-kill again next week. That
makes it look like hogs are abundant. However, that doesn’t
square with the rapid rise in cash hog prices that we saw this week.
It is pretty clear now that labor is sufficient to kill all of the hogs that
are available. The rise in cash hog prices makes me think that
something else is going on. Perhaps producers are having disease
issues that are limiting hog availability. Since packers must buy
some negotiated hogs each day in order for their formulas to work,
they may be running up against producers who are reluctant to sell
in the negotiated market because disease has reduced their hog
supply below what they need to fulfill their formula commitments.
Thus, sharply higher cash prices are needed to bring forth a small
volume of negotiated hogs. This is pure speculation at this point,
but disease issues might also explain why there has been so much
buying interest in the summer contracts recently. Is PEDv rearing
its head once again? It feels a bit like that. I recall back in 2014
when the hog supply started to tighten up unexpectedly and for
several weeks no one knew quite how to explain it. Eventually, the
truth became widely known, but the futures market had already
leapt higher
Whatever it is, the negotiated markets should be watched
carefully. If they keep rising in big chunks then that is a sign to
pork buyers that they had better take coverage quickly because
availability is about to tighten. The rise in cash hog prices has
yet to be fully reflected in the LHI, which could easily reach $85
by the middle of next week. Packer margins expanded this week
as the cutout outpaced the LHI, but next week they are likely to
contract as the LHI catches up. Margins this week were near
$31/head—record large for this time of year. That might explain
why packers are pulling harder than they should on the hog
supply. All of the uncertainty around the hog supply makes price
forecasting rather difficult.
Right now, I’m forecasting the cutout to hold in the high $90s for a
couple of weeks and then come back down into the low 90s.
However, if there is a significant disease problem in the herd,
then all bets are off and it would be very likely that the cutout
would advance well above the $100 mark. Hog weights are not
really showing any signs of the supply being stretched, with
barrow and gilt weights last reported 2 pounds under last year
and working lower. The DTDS weights are almost at the zero
mark, which suggests that producers are a little behind in their
marketings. However, that weight data is two weeks old and it
might tell a different story a few weeks down the road. On the
pork side, export demand is not very good at present either.
China will be hosting the winter Olympics next week, but not
allowing international spectators, so the event didn’t generate
additional demand for imported pork the way it did for the
summer games back in 2008. Mexico is our best customer right
now, but one has to wonder if they will remain a strong buyer with
cutout values hovering near $100. After many weeks of holding
in a sideways pattern, there is now some excitement back in the
hog and pork complex. Next week watch those negotiated prices
like a hawk because if they keep up their rapid advance, the odds
of tightening availability rise considerably.
