Pork Wraps

It was a another soft week for the US hog and pork complex. The
cutout fell $1.14/cwt on a weekly average basis and the negotiated
hog markets were also lower. In fact, something very unusual
happened in the negotiated markets today as the WCB cash price
actually fell below the National price. On a weekly average basis,
the WCB price was less than $1 premium to the NDD and the
attached chart shows that is the narrowest that spread has been so
far in 2022. Is this signaling that the tight supply conditions in the
WCB have finally receded? It is probably to early to know for sure,
but if it is true then that should be considered bearish for cash hog
prices and for the LHI. Speaking of the LHI, it was down almost
exactly $3/cwt this week as the recent losses in the cutout and
negotiated markets became fully reflected in the Index. The LHI
currently sits at $88.63 and it will take further softness in the cutout
and/or negotiated markets to drive it any lower. The Dec futures
finished the week at $84.35, so traders are looking for the LHI to
decline less than $1 per week for the next five weeks between now
and expiration.

I can’t argue too much with that, although I suspect that the LHI will
move below $84 briefly in late November before rallying a couple of
dollars in early December. This week, the bellies and loins were the
biggest drags on the cutout, but that was partially offset by some
modest strengthening in the hams. It seems like every part of the
carcass except the hams is behaving normally for this time of year.
The price strength that hams are demonstrating in the midst of some
of the largest kills of the year is very impressive. I have to believe
that this isn’t all domestic ham demand. Some international buyers
must be soaking up large quantities of US hams. At present the
ham primal is priced about $30/cwt. over last year and the five-year
average. Every week, I keep looking for the hams to break lower
and every week I have to raise the forecast because the hams just
don’t cooperate.

Without this unusual strength in the hams, the cutout would likely be
$5-10 lower than it is today. The belly primal traded $6 lower this
week, but that wasn’t much of a surprise. I expect that bellies will
remain on a downward trajectory until the end of November. This
week I made some significant downward adjustments to the loin
primal forecast because it keeps under-performing and appears as
though it is going to keep working lower in the near term. So the
cutout remains a balancing act, with strong hams at least partially
offsetting weak bellies and loins so that the cutout only trickles
downward a little every week. The forecast has the cutout moving
down to the low $90s by early December and then rising a bit to
close out the year. Pork packing margins continue to run much
tighter than in recent years and this week’s margin came in just
under $13/head. If the narrowing of the spread in the negotiated hog market portends better hog availability in the weeks to come, then we
could see margins move toward a peak around $20/head near the end of
the year. 

That would still be tighter than normal. USDA released its retail
price survey for October this week and it showed retail pork prices advanced
to another all-time high at $5.05/lb. Given that the cutout has been trending
mostly lower since July, this implies that retail margins on pork are quite
strong right now. That’s great for retailers, but high retail prices hinder
movement and that is not a good thing at this time of year when pork
production is near its annual maximum. Next week, retailers will be taking
delivery on their hams for Thanksgiving and we will be eager to see how well
those hams move. Turkey prices are very high this year, so the expectation
is that hams will get more ad exposure than normal and that should result in
better-than-average sales volumes. This week’s slaughter was smaller than
expected, registering only 2.49 million head. That was about 100k below
what the pig crop implied and the biggest miss so far in the Sep/Nov quarter.

To be fair, this was a “small Saturday” week and there could have been
some reduction in the Friday and Saturday kills due to the tropical storm that
is passing through North Carolina this weekend. If the storm did reduce the
kill, then I’d expect packers to run harder next week to help make up the
shortfall. Next week looks like it could be a “triple witching” week for
slaughter where we have three events all converging to produce possibly the
largest kill of the year: possible storm make-up, a “big Saturday” week, and
the week before a short kill week. I’m forecasting next week’s slaughter total
at 2.61 million head. Of course, that will be followed by Thanksgiving week
where the kill might only be about 2.33 million head. As we approach the
end of the Sep/Nov quarter, slaughter levels are telling us that USDA overestimated the March/May pig crop by about 200-250,000 head. Recall that
USDA over-estimated the pig crop prior to that by a little over 700,000 head.

So I guess their estimates are improving, but it could be that we have a trend
of routinely over-estimating pig crops on our hands. Post-Thanksgiving, kills
should remain in the 2.5-2.6 million head range until we reach the end-ofyear holidays. Carcass weights advanced one pound this week, but that
was in line with expectations for this time of year. So far, the weight data
continues to paint a picture of hog producers that are current on their
marketings. That’s a bit at odds with what we are seeing in negotiated hog
prices, but hopefully the picture will become clearer with a couple more
weeks of data. The hog and pork complex seems to be in good balance
right now. Production is seasonally large and prices are working lower as
they should at this time of year. The nearby futures seem to have honed in
on a reasonable value for the LHI in mid-December. The two things that are
a bit out of the ordinary are super-high ham pricing and relatively narrow
packer margins. Next week, watch the hams for potential weakening under
the weight of bigger kills, because there isn’t much outside of the hams that
is supporting the cutout right now.