Pork Wrap April 02
Things slowed down a bit in the hog and pork complex this week,
but they didn’t turn south. The cutout was up about $1.20 on a
weekly average basis, but the negotiated markets and the LHI
gained about $4. I guess after three weeks of $5+ moves in the
cutout, it was time for the market to take a breather and let the
hogs catch up.
Packer margins compressed this week, now at $18/hd. That was
down about $5 from last week, but still a pretty good margin in a
historical context. Packers don’t seem to mind passing though
some of their cutout gains to hog producers and producers are no
doubt thankful for that. In fact, producer margins are now larger
than packer margins. I have producers earning a little over $25/
hd on the animals they marketed this week. Isn’t it amazing what
$100 hogs can do for profitability, even in the face of high grain
prices? The fact that the gains in the cutout have slowed may
lead some to wonder if the great pork rally of 2021 is approaching
its end. I guess that is possible, but my rule of thumb has always
been not to abandon a price move until it has adequately
demonstrated that it is heading the other way. So far that hasn’t
happened here, although we are getting close to the point in time
where I was looking for the rally to end. But even if it is ending,
how fast will it come down?
Pork demand remains exceptionally good. Hog kills are shrinking
seasonally. Weights will be coming down seasonally soon too.
So there are a host of factors that would argue for a very slow and
gradual descent if the pork market is now in the process of turning
lower. The combined margin chart to the right shows the deceleration
in demand growth this week and it does look like it could be
forming a top. The chart to the right shows that the bellies were the big
supporter of the cutout this week while the hams put most of the
pressure on. But hams have not come down nearly as much as I
would have expected based on the end of Easter buying. In fact,
the 23/27 lb hams were quoted at their highest level since mid-
December on Friday. That doesn’t seem like a weakening ham
market to me. Spare ribs have also been very strong lately and
the loin market seems to be holding up very well also. Thus, I
think there’s not enough evidence yet to write this rally off. The kill
this week was constrained a bit by the Good Friday and Easter
holidays and came in at only 2.47 million head.
That should tighten up pork availability a bit early next week
and could give the cutout new life, especially if retail
clearance was good over the holiday weekend. The weather
forecast over the entire US certainly looks very good this
weekend and that could help movement. Pork demand could
also get a boost from soaring beef cutouts as retailers look
for alternatives.
We are now entering that period of the year when hog kills
move steadily lower. By early June, we could have kills
below 2.35 million head and they could approach 2.25 million
at a low point in early July. USDA issued a prospective
planting report this week and it indicated that US farmers are
planning to plant about 2 million acres less than analysts
were expecting and that caused a sharp rally in corn futures.
Still, Jul corn is below the $5.50 mark and thus I don’t think it
is going to alter hog producer behavior much (e.g., cause
downsizing). Strong corn pricing will likely continue to
support the back month hogs however. My guess is that the
period of high hog and pork pricing and the strong profitability
that it is generating will cause hog producers to move back
into expansion mode and the next H&P report is likely to
show an increase in the breeding herd.
When gilts are retained into the breeding herd, they aren’t
available for pork production and so that herd-building
activity would be supportive to pork pricing. USDA did print a
rather large net new sales number to China on its weekly
export report, so we need to keep an eye on that. I can’t
imagine that China is going to be an aggressive buyer of US
pork at these price levels, but it bears watching because if
China shipments and sales pick up substantially, speculators
will notice and could help keep the deferred contracts
elevated. Next week, watch the cutout for signs that
demand is cooling and it is about to work lower. That said,
don’t give up on the current rally until clear evidence of a turn
in demand manifests.
