Pork Wrap July 22
Cash hog prices held about steady this week, but the cutout
gained nearly $6/cwt on a weekly average basis. The chart
below indicates that, once again, it was the processing items that
were the main drivers of the cutout increase. Bellies in particular
caught fire this week. It is a dangerous combination when hams
and bellies are moving higher in tandem. Naturally, packer
margins expanded in a big way. I calculate this week’s margin at
slightly over $13/head, up over $5/head from last week. That is a
pretty wide margin for July and I don’t expect it to stay that way.
Packers are busy scrounging for any extra hogs they can find to
keep their plants operating at a reasonable utilization rate and I
think that is going to cause a further strengthening in the cash hog
market. The weather has not been as hot as advertised in the
Midwest, but it has been hot and that might have some hogs
falling behind schedule for finishing, thus giving producers more
leverage when packers come calling for any hogs that are at
market weight.
Another reasonable question to ask is whether or not the belly
rally has run it course. I don’t think so. Last year, the belly primal
peaked at about $240/cwt in early August and right now the primal
is only at $202/cwt. My forecast has bellies increasing for another
two weeks and then starting to work lower. I don’t see the top
being quite as high as last year, but it could easily reach the
$215-220 area on the primal. Hams, on the other hand, are
probably a lot closer to topping. They have been trading over last
year since early June and the primal is now $7/cwt over where it
was last year at this time. Buyers should soon start to balk at
these high ham prices. If I’m right that the hams are nearing a
top, but the bellies keep going, that means the cutout could hold
around the $125 area or better for 2-3 more weeks and by then
the Aug contract will be nearing expiration.
The belly rally seems like a normal occurrence that was due and
is probably driven by retail features that are scheduled for Aug/
Sep. The ham rally, on the other hand, seems out of the ordinary
and I sure would like to know what is behind it. It is hard to
imagine that Mexico is buying a lot of hams out of the US at these
high prices. More likely, users forward contracted back in the
spring for delivery of hams this summer and now as packers are
delivering on those orders, it has greatly tightened up the spot
market supply. Once those orders are filled, we should see
greater spot availability and retreating price levels. The
processors that normally come into the market in mid-to-late
summer looking to secure raw material for their holiday hams
must be sweating bullets right now.
Or maybe they are the ones taking delivery on booked orders. The retail
primals are holding value well, but not increasing to the degree that the
processing items are. Butts held steady this week but look like they are
making a top. Loins were also steady and probably don’t have a lot of
upside potential from here. On thing that should have been a strong
indicator that the pork complex was going to rally is the price of trims.
Both fat and lean trim have been moving rapidly higher. That is a sign
that processing has slowed, most likely due to limited raw material
availability. Of course, it is the middle of July, so we shouldn’t be too
surprised that pork availability is tight and price levels are high. The
combined margin continued to rocket upward this week as belly and
ham buyers scrambled to find product in the spot market. That shows
up as strong demand and a strong combined margin when the cutout
rises.
My guess is that the combined margin has at least 2 more weeks to
move higher before it makes a top. Users aren’t getting much relief
from the supply side of the market. This week’s kill registered 2.29
million head, which was very close to what the pig crop implied for this
week. However, we are now halfway through the Jun/Aug quarter and
cumulative slaughter is down about 300k from what the pig crop
projected. It’s not a huge miss, but it does suggest that perhaps the hog
supply was a little snugger than advertised. Another possibility is that
the heat has slowed down the hog pipeline so that it makes the hog
supply look tighter than expected, but those hogs will eventually come
tumbling out of the pipeline. I guess that is what the futures bears are
counting on because they are pricing the Oct contract at a whopping $22
under the Aug contract. My fundamental forecast has Oct expiring
almost $29 under Aug, so I can’t argue with the wide spread.
Of course, the longer the current price strength persists, the more likely
that I will need to raise the Oct forecast. Carcass weights ticked one
pound higher this week, but the data were for the week including July 4,
so the gain is probably temporary. The DTDS weights look rather
normal and are not indicating a super-current hog supply yet. We will
need to keep a close eye on that because the potential for heat-related
weight loss doesn’t really go away until late August. Today’s Cold
Storage report showed about a one percent out-movement of product
during June for pork as a whole, but hams showed a 10% increase in
cold storage stocks over the 30 days in June. Total pork in cold storage
is up 22% YOY, but hams in cold storage are only up 6.6%. Belly stocks
are up 46% YOY, so no problems there. Next week, watch the hams
and bellies for further gains and also watch for strength in the negotiated
market as packers continue to search high and low for available hogs.
