Pork Wraps

I hate to keep saying that it was “more of the same” in the hog and pork complex, but that pretty much sums up this week. The negotiated hog markets continued to leak a little lower, with the NDD cash market down $2.37 Friday-to-Friday, but on a weekly average basis it was just $1.59 lower. The cutout was essentially unchanged on a weekly average basis, but up $1.54 from Friday to Friday. Packer margins expanded a tad, now close to $23.50/hd. This week the market had to deal with last week’s big production and yet the cutout held firm. This week’s slaughter came in larger than I was expecting at 2.78 million head, almost the same as the week before. Once again, the kill was way larger than the Jun/Aug pig crop implies (chart below). In just two weeks the industry has gotten ahead of the pig crop by nearly 300k head. Maybe packers are just trying to get ahead in order to mitigate some of the impact of the upcoming holiday weeks, but if they were pulling forward, I would expect that to put some upward pressure on the negotiated markets and we haven’t seen that. It leads me to believe that USDA may have under- estimated the Jun/Aug pig crop and that we may see bigger-than- expected kills in January. Hog weights remain a concern, still four pounds over last year. So, we may end up with more hogs than expected in January and those hogs are likely to be a lot heavier than last year. That double whammy is definitely bearish. However, the demand cycle appears to be close to turning higher. The combined margin chart below shows the margin approaching the zero line and it has slowed its decent considerably in the past couple of weeks. Of course, beef is a lot more competitive with pork given how much beef prices have fallen in the past couple of weeks, so that could help to temper pork’s demand rebound. After I went through the forecasts this week, I now have the cutout bottoming around $75 in the next couple of weeks, but then turning higher once the new year arrives. ThisweekwegottheERStradedataforOctoberandit showed a 13% YOY increase, well below the 25% increase that I was looking for. With the way that the cutout performed in October (average $94), I would have expected exports to play a bigger role in that. Thestrongexportshelped,butnowitisclearthatdomestic demandwasreallystrongalsoinOctober. Thedemandindexforthe cutout in October registered 1.14, which is the strongest demand index so far this year and the strongest ever in the month of October. Only in the PEDv year of 2014 did October demand approach 1.14. It looks like the demand index for Q4 is going to come in about 4% stronger than last year (1.09 vs 1.05 last December). So, even though the combined margin has been signaling a downcycle in demand it has still been way stronger than last year. In fact, if we take all of the months together since the beginning of the pandemic, it is clear that demand for pork has been stronger during the pandemic than it was pre-pandemic. I will cover the reasons for that in my Red Meat Outlook: Special Update which drops next week, but having said that, it bodes well for January demand because the number of COVID infections are going up, not down, and when we combine that with an upswing in the demand cycle, I am pretty bullish pork demand for January. The demand strength could more than offset the extra production coming from heavy carcass weights and bigger-than-expected hog numbers. Right now, I have the cutout averaging $79 for January, but think that there is more risk that it ends up higher, rather than lower. Packer margins normally compress in Jan/ Feb due to seasonally smaller hog supplies and means that the LHI in January could make a run at $70 or above. Next week, expect some further slippage in the cutout and buyers might want to take that opportunity to build some inventory with two short kills set to follow after that. The hog and pork complex has been slowly sliding lower for a long time now, but I suspect that the next turn higher is just around the corner.