Pork Wrap April 16
The pork cutout was about a dollar higher on an average basis this
week, but the negotiated cash hog markets were almost $2 higher.
That compressed packer margins down to a little under $16/head.
The lean hog futures were volatile this week and the most active
Jun contract lost almost $7 on the week. Apr went off the board on
Thursday and will cash settle at $103.24. The same “loss of faith in
the future” that plagued the cattle market this week also influenced
the hogs. At these high levels, futures tend to be very jumpy.
Traders don’t think in terms of sideways markets, they either figure
it is going up or going down and if the cash market stops going up,
then it must be about to go down. The problem with that thinking is
that the cash market hasn’t stopped going up yet. Traders are
trying to pick a top and that is always a risky proposition. Perhaps
the biggest contributor to the change in psychology this week was
some softness in the belly market. Traders know all too well how
fast a belly market can decline and how fast it will drag the cutout
down. However, the chart to the right indicates that the belly was really
the only primal with pricing problems this week, and even those
weren’t too severe. Traders would be better served to take their
cues from the relentless advance in the negotiated hog markets.
Packers wouldn’t be paying up for negotiated hogs day after day if
they thought the cutout was about to fall apart. Measured from
Friday to Friday, the WCB cash market was up almost $4.50 and is
now approaching $106. My model says that if the cutout and
negotiated markets to stay at Friday’s close, then the LHI will be
worth $106 by the end of next week. It will be interesting to see if
the bears are willing to continue selling with the LHI at that level.
This week’s kill came in at 2.47 million head, which was once again
very close to what the Sep/Nov pig crop projected. Barrow and gilt
carcass weights remain stuck at 215, but it isn’t unusual for carcass
weights to hold in a sideways pattern at this time of year before
turning lower into summer. So, the supply side of the market
continues to look well behaved, although the continued rise in the
negotiated markets makes me think that perhaps some tightness in
the producer-owned hog supply is starting to arise. Retailers are
probably not very pleased with these high wholesale prices, but
they don’t have many good alternatives. Beef is super-expensive
right now and while chicken is a little less pricey, it is still high and
not a first choice among consumers. This makes me wonder where
any future weakness in the cutout might originate.
Clearly, the bellies are a candidate, but we are coming into
prime bacon season. Cold storage stocks of bellies are very
low. Recall that bacon producers had to switch bacon
packaging away from foodservice bulk-type toward retail
consumer packs last spring when COVID broke. Now, with
foodservice on the rebound, they will need to reverse that
change and it could leave one channel or the other short of
product for a while.
Hams have shown surprising resilience and processors will be
busy preparing for the upcoming sandwich season. I’ve got
hams forecasted to ease a little in the next few weeks, but they
are likely to remain well above historical averages for this time
of year. We are starting to see a little weakness in the lean
trim and I can’t help but wonder if that is because hams are
starting to go into the grinder. Ribs are getting hit with a
double whammy of strong demand from foodservice reopening
and consumers in the retail market looking to fire up their
smokers this spring. To me, the butts seem like the logical
place for price softness to set it, but it hasn’t happened yet.
The combined margin was higher again this week, but only by
a little. It looks like it might be ready to make a top, but it has
head-faked similarly a couple of times during the recent
uptrend so I’m not ready to call a top in the demand cycle.
The net new export sales numbers were small on this week’s
report, but that shouldn’t be surprising given the high pork
prices. I’m actually surprised that exports have held up as well
as they have throughout this run up in pricing. The Philippines
has greatly increased its purchases of US pork as that country
grapples with serious ASF spread. China has been taking a lot
of US pork too, but that share isn’t growing, it is in more of a
sideways pattern of late. So, we are left with a market that
continues to experience very strong demand and a hog supply
that is slowly declining in seasonal fashion. The supply side
looks pretty positive over the next couple of months, so if one
wants to bet on lower hog and pork prices, they will need to
count on demand stumbling. I’m not really looking for much
demand weakness from now until Memorial Day, but have built
in some softening as we move into June. Even so, hog and
pork prices are likely to stay well above historical norms well
into summer.
