Pork Wrap July 29
The hog and pork complex is starting to behave as if it is approaching a top after rising persistently since April. It looks like it is going to be one of those tops that is carved out gradually, rather than abruptly. This week the cutout only advanced $0.57/cwt on a weekly average basis and the NDD negotiated market added $0.96/cwt. The combined margin chart is also pointing to an impending top as it only posted a very slight gain from the week before. For futures traders, the important question is whether or not the top will be made and prices turn lower before the Aug contract expires 11 trading days from now. My guess is that the top will be very close to expiration day, but it might come sooner. The attached chart indicates that, once again, it was the bellies that provided the lion’s share of support to the cutout this week. In fact, all of the other primals were lower on the week. It always makes me a bit nervous when there is only one pillar of support in the cutout because that pillar could easily get kicked out and thus bring the cutout crashing down. Hams, which provided so much of the support during the early and middle portions of this long rally, seem as though they are running out of gas. We saw the 23/27 bone-in hams print $92 one day this week after being at $112 just a few days before. However, now they seem to be holding fairly well in the low-to-mid $90s, so it seems unlikely that that they are going to completely collapse. The 13/17 lb bellies printed near $260 on Friday afternoon on very good volume, so bellies are holding up quite well for now. However, bellies have been know to suddenly print $30-40 lower, and they did that in August last year, so vigilance is key. A sudden big drop in belly prices could take the cutout down $10-15 in a matter of days. The forecast has a bellies continuing a little higher in the next couple of weeks, but after that look for prices to turn lower. Last year, the highest belly primal price of the year was posted in the first week of August, so maybe that will repeat again this year. The retail items continue to waver, and those could also be detrimental to the cutout in the next couple of weeks if they break lower. My thought there is that big price declines are not likely until pork production expands further and that doesn’t really happen until the middle or end of August. This long rally in pork prices has been so methodical and well-behaved that I’m inclined to think that the turn lower will be also, and thus we won’t see a sudden collapse. Packer margins continue to be very good, estimated this week to be a little over $12/head. Packers have been sharing some of their good fortune with producers in the form of higher negotiated prices, but they have been very disciplined in their approach so that their margins haven’t been unduly threatened by aggressive competition for spot hogs. I calculate producer margins at about +$20/head this week, which is well below what producers have realized in the past couple of summers, but much better than the -$60/head margins they were dealing with this spring. Combined, the margins only advanced by about $1.50/head this week however, and that sends a signal that the current upcycle in demand is about to come to an end. This week’s kill came in larger than expected at 2.39 million head, up about 75k from the prior week. It will be interesting to see if the additional production hastens the turn in the cutout. Barrow and gilt weights were reported steady this week, but the weather has turned hot in the midsection of the country and that makes me think that weights have another pound or two of downside risk before they make their seasonal bottom and turn higher. The DTDS is also at very low levels, so it seems that hog producers are keeping very current on their marketings. This week’s kill was larger than what the pig crop implied by about 50k head, so it seems that the Dec/Feb pig crop was underestimated, but probably not to the degree that we saw for the prior two pig crops. We have also being seeing more sows than expected come to slaughter over the past few weeks which could be a sign of stepped-up breeding herd liquidation. If that is the case, then prices on the 2024 futures contracts are looking too cheap. It almost seems like futures traders are not quite ready to move past this spring’s super-soft demand environment and want to continue to project softer-than-normal demand into the distant futures contracts. So the shorts there could end up getting hit with the double whammy of stronger-than-expected demand and smaller-than-expected kills due to breeding herd reductions. Time will tell on that. One area of concern that has recently emerged is a softening in exports, particularly to Mexico. In last week’s export numbers, USDA reported movement to Mexico down over 30% YOY. That could just be the normal reduction in quantity purchased due to higher US pork prices and if that is the case then the export picture could brighten after Labor Day when kills expand seasonally and price levels retreat. We are hearing less about Prop 12 these days and we certainly haven’t seen any negative price impact from the California law since it became effective on July 1. Maybe the industry was better prepared for Prop 12 than we realized and it could turn out to be a non-event. We will get a much better test of that near the end of 2023, when authorities in California have signaled that they will step up enforcement efforts. For now though, it looks like the industry is approaching the crest of a very long demand upcycle and within a week or two we may be talking about a shift to lower hog and pork prices. Hopefully it will be a smooth transition from small supplies and higher prices to expanding supplies and price declines. Next week, watch the bellies like a hawk because that is the only thing keeping the cutout from turning lower at the moment. Also keep an eye on the heat dome in the middle of the country because that has the potential to prolong the current rally if it sticks around long enough.
