Pork Wrap July 29
Prices in the hog and pork complex continued higher this
week, with the cutout adding $3.24/cwt on a weekly average
basis and the WCB negotiated market up $1.57/cwt. We are
still seeing a strong positive influence on the cutout from the
bellies and hams. The ham primal averaged close to $117/cwt
for the week and that was the highest it has been since 2014
when the PEDv crisis cut hog supplies unexpectedly. Further,
the cutout, which averaged over $127/cwt this week is also at
its highest level since 2014. So, this is a pretty rare market
that we are experiencing right now. Of course, the question on
everyone’s mind is, “how long will it last?” If history is any
guide, it probably won’t last too long.
When prices in the pork complex move to extreme levels and
then top, they tend to fall rapidly and I expect that is what will
happen once the current strength in the hams and bellies has
run its course. It is difficult to know exactly when the top will be
made and that is causing traders in the Aug futures to be
somewhat cautious. That contract only has 10 trading days to
expiration and for those that have positions, it will be very
important whether or not ham and/or belly prices break lower
before or after expiration. Traders did close the gap between
the Aug contract and the LHI this week, but the Index is
projected to print close to $123 early next week and by the
time that happens there will only be seven more trading days
left. And of course, there is always the risk that it will continue
to trend upward beyond the $123 level.
As a result, the hog and pork complex has a level of
excitement and uncertainty that just doesn’t exist in the beef
market right now. The combined margin chart continued on its
steep upward trajectory this week, but it normally doesn’t take
long to reverse course, so just because it moved a lot higher
this week doesn’t mean that it can’t move sharply lower next
week. It has already gone further than I thought it would. The
retail primals looked a little more shaky this week, with the
butts in particular losing some luster. I don’t think any of the
retail primals are going to exert a lot of downward pressure on
the cutout until after Labor Day, although the butts probably will
continue to leak lower. Trim prices are very, very strong right
now also.
42s averaged almost $125 this week and the 72s averaged close to
$134. Kills are small and that likely contributes to the high price
levels, but I can’t shake the feeling that somehow the high ham price
is also feeding into the price of trimmings. Perhaps there just isn’t
much ham trimming going on domestically right now. Maybe
untrimmed hams are being moved into export channels and that is
keeping the supply of domestic trim tight. My guess is that when we
do see ham prices break lower that will be followed pretty quickly by
lower trim pricing. This week’s kill registered 2.29 million head, up
only 6,000 from the week before. Next week, we should see the kill
back over 2.3 million head and it will likely be 2.4 million or more by
the end of August.
Carcass weights likely have further to fall before they bottom and the
heat wave that is in the forecast for the Midwest during the first two
weeks of August will likely help that along. The DTDS weights are a
bit on the low side and that may be part of the reason why negotiated
hog prices have been so firm lately. Packers only scheduled 9000
head to be killed on Saturday, so either they can’t find enough hogs
out there or they are attempting to cool off the negotiated market. I
would lean toward the former explanation since margins this week
were calculated over $13/head. That is a pretty robust margin for
August and we need to recognize that it is supported by the small
volumes of hams and bellies that are reported in the negotiated
market each day. If packers have bigger volumes booked at lower
prices then their actual margins would be less than the cash-to-cash
calculation suggests.
I don’t think that the spot hog market will decline substantially until
after the cutout breaks lower. The forecast has margins tightening
up as we move through August, and we could even see some brief
periods of negative margins if the cutout moves down quickly. Export
activity seems to be slowing a bit in response to high domestic pork
prices. There is no evidence yet that China is eager to increase its
purchases of US pork. Next week, the hams and bellies will continue
to be center stage because price changes there will determine the
direction of the cutout and ultimately where the Aug LH futures
expires. It is important to continue to watch the weather also,
because if the Midwestern heat wave turns out to be hotter than
expected that could cause the price strength in the pork complex to
persist longer than currently envisioned.
