Pork Wrap June 25
What a wild week it has been in the hog and pork complex. It has
become abundantly clear that the cutout has finally turned downward
after six month of moving almost straight up. The chart below
indicates that it is primarily the loins and bellies that have pushed the
cutout lower. However, the bellies appeared to bounce back some
Thursday and we know that cold storage stocks of bellies are pretty
light. This week’s cold storage report showed belly stocks down
40% from last year and the five-year average as of the end of May.
Some belly slicers that normally would have drawn on frozen
inventories during the summer are likely being forced into the cash
market.
Hams, on the other hand, are only 17% below their five-year
average. It is pretty clear to me that the main retail cuts—loins, butts
and ribs have topped and will probably trend lower through the
remainder of the summer. The direction of bellies and hams
however, is less certain. Low stocks could mean a belly rebound in
the weeks ahead and hams appear to be cycling higher after three
weeks on the defensive. I don’t think that any strength in the
processing items will be enough to offset the decline in the retail cuts
and thus the forecast has the cutout working lower through the end
of July. On Tuesday, the cutout lost nearly $13—the biggest daily
drop ever recorded as packers puked up bellies at a sharp discount.
Often these kinds of events are followed by a sharp rebound, but it
definitely affects the tone in the market and can cause buyers to step
back. The bellies posted a significant increase Thursday, but I’m not
sure that it is going to stick. There is so much volatility in all parts of
this market right now that forecasting is an exercise in frustration.
The futures market sells first and asks questions later. Thursday, the
July contract, which was trading around $120 less than two weeks
ago, settled at $100. August has taken a beating also. My, how
quickly the air can come out of an inflated market. The quick retreat
in the cutout has caused packer margins to go sharply negative and
they are beginning to pressure the cash hog market. I have packer
margins at -$17/head this week, but the true value will probably be
closer to -11/head once all of the softening in the negotiated markets
gets fully reflected in the LHI next week. Clearly, packers are not
happy about this situation and have decided to kill almost no hogs on
Saturday in an effort to correct their margin problem.
That could help support the cutout next week, but it in this
environment it is going to be tough to convince a pork buyer to
pay higher money for anything. I don’t think consumer demand
has declined nearly as much (if any) as recent wholesale price
declines would suggest. This is purely a feedback loop created
by scared futures traders selling out of some very high priced
contracts which then causes pork buyers to back away and the
resulting drop in the cutout scares the futures traders even
more.
If consumer demand is still strong (and I think it is), retailers
won’t be able to back away from the pork market for long or
else they will have empty meat cases and that is unacceptable.
If this were November or December when pork supplies are
huge, then I would say look for the cutout to fall $20 or $30 in a
short about of time. But this is late June, when hog and pork
supplies are a their seasonal low point and that makes me think
that there is a reasonable chance of greatly slowing the fall or
perhaps even getting some small increases in the next couple
of weeks.
Today’s Hogs and Pigs report didn’t hold any big surprises, but
the Mar/May pig crop was about 1.2% smaller than the average
analyst forecast and 3.1% smaller than last year. The data
didn’t show wild expansion in the breeding herd as a result of
this spring and summer’s strong pricing. That is a good thing,
because it is looking more and more like China is starting to
back away from the US pork market and if that continues there
will be lots of pork looking for a home later this year. Next
week, watch everything because it is going to be a fascinating
market with volatility everywhere. Strap on your seat belt and
enjoy the ride!
