Pork Wrap July 1
The hog and pork complex eased a bit this week as the cutout
dropped $3.36/cwt on a weekly average basis and the WCB
negotiated hog market was down $1.15/cwt. The LHI, which lags
the other markets, was actually up about $0.30/cwt on the week.
I think most of the easing in the negotiated markets can be
attributed to packers having less demand for hogs due to the
holiday, which should be transitory. The softening in the cutout
can almost entirely be traced to the belly primal, where a very low
print on Tuesday afternoon set the tone for a lower average for the
week. The belly primal averaged $145 this week and there have
only been 4 other weeks so far in 2022 where the average has
been lower. Given that we are currently at the tightest production
of the year, it makes sense to me that bellies have more upside
opportunity than downside risk at this point. On the other side of
the spectrum, we have hams, which held up valiantly this week and
are very close to their highest point so far in 2022.
The small production around Independence Day may keep these
from showing too much weakness in the near term, but as we get
further out into July, I expect that hams are going to retreat. The
butts, which I’ve highlighted recently due to extraordinarily strong
pricing, averaged a little higher again this week but near the end of
the week they were trading lower and the weekly chart seems to
be suggesting that the butts are making a top and will soon move
lower. It seems likely that the other retail primals such as loins and
ribs are going to ease over the next few weeks as kills start to
slowly increase and pork demand has to contend with the dog days
of summer. That keeps the cutout on a downward trajectory even
if the bellies do manage a rally as expected. I’m not looking for
rapid collapse in the cutout just a slow easing in the average of
$1-2 per week
Futures traders don’t seem to agree with that in the near-term, as
they are pricing the Jul cutout futures close to $111, which would
be about $3 higher than this week’s average cutout. Perhaps they
are anticipating a bump in the cutout due to the short kills and I
have to concede that is a distinct possibility for next week, but by
the time we get into settlement week for the Jul contract production
will have expanded back to normal and the cutout should be
moving lower again. The combined margin appears to be making
a top now, which could be a signal that softer pork demand is on
tap for the balance of the summer months. This week’s slaughter
registered 2.29 million head as packers pulled back on the Friday
kill and reduced the Saturday kill to a paltry 9000 head. It is a long
weekend for a lot of pork plant workers. Monday’s kill should be
almost zero, but look for packers to push next Saturday’s slaughter
above 100k in order to help offset some of Monday’s lost
production.
Even so, we are likely to see next week’s kill fall below 2 million head.
When that happened last year for the Fourth of July, both the ham
and belly primals posted impressive gains. Processors likely let
inventories run a bit low ahead of the holiday and thus will need to refill
right when production is at its lowest. Barrow and gilt carcass weights
were reported another pound lower this week and are likely to post a
1-2 pound decrease in next week’s data. This is all part of the normal
drawdown in weights that happens during the summer. The weather
forecast for the Midwestern production regions seems rather benign
until about the middle of July, when the chance for above normal
temperatures increases. That is worth keeping an eye on, but the
reliability of weather forecasts much beyond 7-10 days is low. There is
not much new happening on the trade front. Pork exports appear
to be holding in a mostly sideways pattern and now we are getting to
the point in the calendar where we saw big export declines last
year, so the YOY comparables are not as stark as they were earlier
this year.
Hog and pork prices are slowly rising in China, but I really don’t think
they are near the point where it would generate a material increase in
purchases from the US. The bigger risk is that relatively high summer
pork pricing will cause a modest decline in Mexican purchases. This
week’s Hogs and Pigs report showed that producers added 70,000
breeding animals between March 1 and June 1, which is a bit
surprising given the high feed cost environment that was in place
during that period. That was more than I had been expecting prior to
the report, so adopting USDA’s numbers caused some modest
declines in my distant pork price forecasts. The March/May pig crop
was reported down 1% YOY and those will be the animals that
come to slaughter during the Sep/Nov quarter this fall. The Dec/
Feb pig crop had been reported down 1% also earlier this year and
so the market has adjusted to working with a slightly smaller hog supply
and the new report confirms this is likely to continue through the
balance of 2022.
So, there doesn’t seem to be much in the way of supply side
surprises for the hog and pork complex over the next six months or so.
Disease problems are often confined to the winter and spring quarters,
so they don’t create a lot of uncertainty in summer and fall either. I
think it will be the demand side that holds the most potential to surprise
us in coming months and if I had to guess, that surprise could be that
demand is softer than most expect given all that is going on in the
macroeconomy. Next week, watch for a belly rebound on holidayshortened production and also keep an eye out for a rebound in the
negotiated hog markets as packers look to get back to a full kill
schedule after Monday
