Pork Wrap October 7
After trending lower for the past couple of months, the pork cutout
managed a small gain this week, adding $0.57 to average just
over the $100 mark. Cash hog markets were a little weaker, with
the WCB negotiated market dropping $1.74/cwt. on a weekly
average basis. With pork moving up slightly and cash hog prices
moving lower, packer margins expanded out to about $13/head.
That represents about a $7 spread between the cutout at $100
and the LHI which is now close to $93. Perhaps the most
surprising feature of this week’s market happened in the futures,
where traders beat down the nearby Oct contract to below $87 on
Tuesday only to realize that was a significant mistake and thus
the contract rallied $6 over the next three days to finish the week
just a hair below $93. I’m not really sure why traders felt the need
to sell Oct so hard when it was so close to expiration (next
Friday), because the rate of decline in the LHI suggested that
there was very little chance that the index would drop to $87 in
just eight trading days.
Part of what prompted the turnaround in the futures was some
strengthening in the cutout, which moved from below $99 early in
the week to over $101 for the last two days of the week. Those
gains were largely driven by stronger belly and ham pricing. Just
when I thought that the strength in the hams had finally topped,
the primal was able to add more than $2 this week. I’m a little
uncertain as to where the hams go next. Growing production and
the narrowing window to get hams processed in time for the
holidays suggests that ham prices should work lower, but those
conditions have been in place for a few weeks now and we have
yet to see any meaningful weakness in ham prices stick. They
may get pushed lower for a few days, but they always seem to
resurrect. I’m going to keep the forecast on a slight downward
trajectory for now, but recognize that hams are probably going to
stay well above last year for most of Q4.
With respect to the bellies, I’ve been suggesting for the past few
weeks that they were due for an upward move and this week the
belly primal managed to add almost $8/cwt. Belly prices are still
quite low relative to recent history, so perhaps this week’s gains
will cause some buyers to get off of the fence and break out the
checkbook. I don’t think a huge price rally is in the cards for
bellies, but they may be able to build on this week’s rally for a
couple of more weeks before growing production moves them
lower again. One thing that gives me some hope for further gains
in the bellies is that trim prices have been holding up rather well
recently and there is normally a pretty strong correlation between
trim prices and belly prices. On the losing end of the spectrum
this week was the retail items, particularly loins and butts. The
butt primal lost about $6 on a weekly average basis and the loin primal was down about $2.50/cwt.
These are the items that pork month
promotional incentives were designed to support, but even a well
planned industry promotion can’t always overcome the negative effects
of seasonally increasing pork production. I’m looking for the cutout to
average just over $100 again next week on further belly strength and
then start to slip slowly lower until it is near $90 in mid-to-late November.
Last year, the cutout lost $23 from early October until mid-December and
that may be influencing the way that futures traders are pricing the Dec
contract, but that big drop was a bit of an outlier. Usually a decline of
$4-6/cwt is more common. I’m going to stretch that a bit and call it down
$10-12 this year, but I can’t find a plausible scenario where it loses $23.
It does seem like traders have been overly negative on the Dec contract
and it finished today more than $15 below the Oct contract and close to
$77. My read on the fundamentals suggest that $83 would be a better
choice for Dec.
It might even outperform that because the combined margin is acting like
it wants to bottom again and if that holds, we could see a much flatter
trajectory in the cutout and LHI than the futures currently imply. I’m not
ready to call this week’s little uptick in the combined margin a bottom, but
it sure seems like it is in the right zone for it. Next week’s data should
help clarify. This week’s kill registered 2.56 million head and that was a
little larger than what the March/May pig crop implied. As we approach
the halfway point in Q4, it looks like the industry has underkilled the pig
crop by about only 100,000 head. It’s not a big miss, but it makes me
think that perhaps there are just a few less pigs out there than what
USDA projected for the Sep/Nov quarter. The industry will start killing
the summer pig crop come December and that was estimated to be 1.1%
below last year. So, YOY production declines are dialed in for the next
few months unless the survey missed a lot of pigs. Barrow and gilt
weights were steady at 210 pounds this week, marking their third week in
a row at that level.
The uptrend in weights should continue next week and probably won’t
top until mid-November or later. There isn’t anything in the weight data to
suggest that the production pipeline is experiencing any problems.
Export data for August became available this week and it showed a 2.6%
YOY decline. Movement to China was actually up about 9% YOY, but
that is only because we are now lapping the point where exports to China
dropped off a cliff last year. Mexico is looking like the most promising
destination at moment that probably says a lot about why the ham market
has performed so well this year. The US dollar hasn’t appreciated
against the peso to near the degree that it has against other currencies,
so Mexican buyers have an advantage there. Imports remained elevated
in August, up 2% from last year and about 9% stronger than in July.
Next week, watch for further strength in the bellies—it will be needed if the
cutout is to hold above the $100 mark.
