Pork Wrap July 15
The pork cutout surged higher this week, gaining $4.13 through
Thursday to reach $118.51 and demolishing my theory that last
week was the top in the cutout. The LHI gained $2.21 through
Thursday as it reacted to the higher cutouts and should have at
least another $2 worth of follow-through if nothing else
changes. The negotiated hog markets were stalled this week
and the NDD average through Thursday was down about
$0.55/cwt. That allowed packer margins to expand with the
cutout and I have margins averaging a little over $7/head this
week. As a result, packers are likely to continue to bid
aggressively in the negotiated markets and it wouldn’t be
surprising to see them gain some next week. The processing
items led the way this week, with both bellies and hams moving
higher. Together, the belly and ham primals make up 41% of a
hog carcass so when they start moving in the same direction it
is a powerful force.
23/27 bone-in hams were quoted over $118 on Wednesday
and through Thursday the weighted average was $108.31.
Clearly, someone was needing bone-in hams pretty badly. The
belly move higher was less surprising, only because the bellies
were rather lethargic during June and were overdue for an
increase. It is worth noting that the retail primals also posted
gains this week and that could just be from a general tightness
in availability coming off of the holiday week. When we put it
all together, it equates to a strengthening cutout and the big
question is whether or not this week’s momentum can be
continued. The sharp increase in the cutout moved the
combined margin higher and makes it look like perhaps a new
demand upcycle is starting.
The timing of that is a bit surprising to me, but it is difficult to
argue with the data. So, it is possible that we might have to
wait a little longer to see the cutout top. Slaughter levels will
likely remain pretty constrained in the next few weeks, so the
amount of supply side relief for prices should be limited. I’m
projecting this week’s slaughter at 2.27 million head, which is
just a hair smaller than the week leading up to Independence
Day. If that forecast is correct, then this week’s kill would be
almost dead-on what the pig crop implied. Now that packers
have a little margin back in their pockets, they might look to
expand the kill next week, provided they can find the hogs.
They will need to walk a fine line because if they press it too
much, they run the risk of accelerating the negotiated market
higher.
All of this renewed price strength happening right before the July
expiration has been a problem for the bears and it now looks like July
will expire close to $115. This week’s price action has also caused
me to revise most price forecasts higher. I now see fair value for Aug
somewhere close to $110, but there is a very real risk that it trades a
lot higher before that. There is some very warm weather forecast
for the next two weeks in the Midwest and that creates a concern
about hog weights falling faster than expected and thus reducing the
available supply of market-ready hogs in the near term. That has the
potential to be price supportive at a time when prices are already
rising. I am factoring that into my forecast for the Aug futures and
buyers should be watching the weather forecast closely in the next
couple of weeks. USDA released its estimate of retail pork prices for
June this week and the average price was up almost $5/cwt to
$493.10.
That is another all-time record and I don’t expect that retailers will be
lowering prices much, if any, until after Labor Day when they should
be seeing much more favorable wholesale pricing due to larger
slaughter levels. The macro picture remains pretty dismal, with
equity markets moving consistently lower and increasing fears that
the Fed will send the economy into a recession this fall as it raises
rates to battle inflation. Eventually, those things will matter to pork
pricing, but right now seasonally small supplies and weather issues
far outweigh demand concerns. Hog and pork prices are rising fairly
fast in China and that raises the potential that they will purchase
more pork out of the US, but so far we haven’t seen any indication of
that in the data. If they do become bigger buyers of US pork, they
would likely wait until fall when price levels should be much more to
their liking.
A very strong US dollar could work to discourage pork exports and
encourage imports in the second half of the year. Traders in the corn
market are watching the weather situation carefully too. Corn futures
are well off of their highs, with new crop corn trading around $6/bu,
but the next couple of weeks encompasses the critical pollination
phase for corn and if it is too hot and dry during that period, yields will
suffer. I estimate that the drop in corn prices, along with rising cash
hog prices, has helped restore profitability to the hog production
sector, where margins are now around $17/head. Next week, watch
the weather above all else and keep an eye on the hams and bellies
too because they are the engine that has been responsible for the
recent upward burst in the cutout.
