Pork Wrap September 2
The hog and pork complex remained on the defensive this
week and the main feature was a huge $18/cwt drop in
reported negotiated prices. The WCB negotiated market
averaged $107.38 this week, down from a little over $125 the
week before. It isn’t all that unusual to see the negotiated
market follow the cutout down after a big drop, but it is
interesting that while USDA was reporting WCB base prices at
$107, the negotiated price that goes into the LHI calculation
was still around $125. Either there is a big delay in prices
flowing into the index or producers are getting some huge
premiums on top of the base price that has allowed that LHI
negotiated price to remain so high. This disconnect bears
watching over the next couple of weeks. The cutout fell $3.71
this week to average $102.41 and we can see from the
attached chart that it was the bellies once again that drove the
decline.
Some of the retail items were lower also, but that might just
reflect the end of Labor Day buying and if clearance is good
over the long weekend, we could see those retail primals get a
nice bump next week. Hams were the bright spot in the pork
complex this week as prices first stabilized and then moved
higher as the week progressed. If the hams are finished going
down for now, then it could be difficult to get much further
weakness in the cutout, particularly if the bellies show some
life after the holiday. There is a school of thought that says
that processors lighten up on their demand for raw materials
ahead of a holiday week and then come back strong after the
holiday to replenish the pipeline. That might explain why
bellies and trims were so soft this week and it may offer a clue
as to what will happen next week as processors ramp back up.
I’m forecasting the cutout to average a little over $2 higher
next week but feel like I might be too low on that. The belly
primal finished the week at $137/cwt and the weekly average
was $143/cwt. We have to go all the way back to January to
find bellies that cheap. I suspect that some buyers are eyeing
this as an opportunity, and we could see improved demand for
bellies next week. The attached chart puts the average price
for bellies this week right in line with its previous two low
points this year. This could act like a support level in the near
term, but I suspect that bellies will need to trade below that
level for a while during Q4 as seasonally large production
makes its way through the system.
Hams have been very resilient this summer and that makes me think
that this week’s small increase in the primal value could be followed
by another week or two of higher ham prices. Any processors that
haven’t secured their raw material commitments for Thanksgiving
and Christmas hams had better get busy in the next few weeks or
risk being constrained by a lack of smokehouse space and
processing capacity. Of course, the biggest thing that makes me
optimistic about seeing some gains in the cutout next week is the
short kills. Packers really pulled back on the Friday and Saturday
kills this week and that resulted in a 50k reduction from the week
before and produced a total kill of 2.35 million head. Next week,
without a Monday kill, slaughter could total only 2.2 million head. So,
there is a short-term supply constriction that could be favorable to the
cutout. After next week, the Mar/May pig crop estimate suggests that
weekly kills should quickly eclipse 2.5 million head.
Keep in mind that most of the increase in slaughter between Labor
Day and Christmas typically happens before Halloween, so that will
be the period of greatest supply pressure on the market. The pork
industry tries to counter this by funding “pork month” in October,
where retailers can collect some financial incentives for featuring
pork aggressively. That seems to work pretty well since the average
change in the cutout between the end of August and the middle of
October has been +$4.70/cwt over the past 10 years. Last year, the
cutout dropped $4 during that period, but in 2020 it gained $21 and in
2018 it gained $13/cwt. So, it isn’t a given that the cutout is going to
collapse over the next six weeks, and it is hard to justify Oct LH
futures near $90 at expiration without further significant pressure on
the cutout.
Granted, the macro environment for pork demand probably is worse
this year than in the recent past, but that was the case this summer
too and demand held up way better than expected. It seems to me
that enough damage has been done to the hog and pork complex
and now it is time for some modest recovery. Next week, watch for
signs that buyers are finding value in bellies. Retail primals should
also perform well. If it becomes clear that the cutout is gaining
support, then I suspect the futures will jump with joy.
