Pork Wraps

Last week, I said it was important that we see the cutout hold on to its
gains. It managed to do that this week, but it didn’t add very much.
The cutout was up $1.10 on a weekly average basis and the attached
chart shows that all of the primals contributed a little bit to this result.
That type of pattern, where all of the primals rise by a similar amount,
makes me think that the gains were more a result of the holiday shortened kill last week (and Monday of this week), rather than any significant improvement in demand. The fact that neither the hams or the bellies moved lower this week is a positive, but it certainly isn’t a rapidly-improving demand environment. The combined margin was essentially flat this week, which further attests to how weak the demand gains were. A big question in my mind is what happens to the cutout as supply returns to normal. Packers killed an estimated 114,000 head this Saturday compared to only 8,000 last Saturday. That will refill the product pipeline early next week and it will be interesting to see if product pricing can continue higher when packers have more meat to sell.

This week’s total kill came to 2.37 million head, but that number
includes a very weak Monday kill of only 353,000 head. This Monday’s
kill should be a lot bigger and could push the weekly total back over 2.4
million head. Seasonally, demand should be improving as grilling
season takes hold, but I’m concerned that given the high level of prices
already, that further gains might be hard to come by. The beef cutouts
seem to be faltering right in the sweet spot of the calendar for beef
demand and that makes me wonder if beef is just the “canary in the
coal mine” for pork and eventually pork demand will meet the same
fate. Hams have already advanced further than I thought they would
this spring, so that is one primal that I’m concerned about. Bellies are
another, but the big rallies in bellies normally are driven by aggressive
retail bacon features and I don’t think we are going to see consumers
respond very strongly to retail bacon features this spring and summer.
Instead, consumers will get their bacon on sandwiches at fast food
outlets or off the buffet at the hotel while they are traveling.

Cooking bacon at home is probably not a high priority for consumers
who have finally been set free from pandemic restrictions. That said,
prices could continue to work higher without a big demand boost,
simply on the back of shrinking pork production over the next couple of
months. However, in order to get pork prices rocketing higher, we
would need to see a boost from the demand side as well. And that is
the part that I think futures traders are missing. They have been
pricing the summer contracts like the cutout is just going to rocket
higher (a la 2021), but without a strong demand surge we may only see
moderate price increases this summer that look more ordinary that
exceptional. A case in point is the May futures, which was trading near
$116 on Tuesday of this week when the LHI was only at $101, implying
a $15 increase in the LHI over the three weeks remaining in that
contract’s life.

That kind of a rally has happened before, but only under
exceptional circumstances that I just don’t think exist right now.
Eventually, traders did a re-think and the May contract finished the
week below $112. That is still probably out of reach. I have fair
value for May expiration at around $106, although I could concede
a couple dollars above that. The negotiated cash hog markets
were interesting this week. They got off to a fast start with the
WCB price printing $108 on Tuesday after finishing the week
before at $100. However, that didn’t hold and by Friday afternoon
the WCB was quoted at $103.72. On a weekly average basis, the
cash markets were higher, with the WCB up $4.81 and the NDD
quote up $3.06. That just about offset the gain in the cutout, so
margins were unchanged at $16/head. By early next week, the LHI
will register more of the negotiated gains and thus I’d look for next
week’s margins to be closer to $10/head unless the cutout makes a
surprising jump. That brings up another point.

For the LHI to escalate as rapidly as the May and Jun contracts
want to imply, it is almost imperative to have a rapidly rising
negotiated cash market and I don’t sense that at present. There
seems to be some goofiness going on in the WCB, where it will
print sharply higher prices for a day or two and then pull back.
Some have suggested that one packer in that region lost more of its
own hogs than normal to disease this spring and thus have been
forced to be more aggressive in the spot market. When that packer
is in the market, prices jump and when it is out of the market, prices
fall back. That makes for a lot of volatility in the WCB price, but it
isn’t the type of situation that is going to drive negotiated prices
higher each and every day as would be needed to move the LHI
rapidly higher. The attached chart gives the change in the LHI from
the third week in March to the third week in April. This year, that
change has been very near zero.

There have been some years when the index was moving quickly
higher, but this doesn’t seem to be one of them. I suspect that
traders are remembering last year’s move and expecting that
to repeat this year. The weekly export data looked pretty soft
again this week and that is another headwind that the market is
facing this spring that it didn’t have to deal with last year when
exports were actually a pretty strong tailwind. Carcass
weights were reported steady this week and seem to be behaving
normally, so I don’t have any concerns about the supply pipeline at
this point. In all, I think this is shaping up to be a rather
sedate spring and early summer hog and pork market.
Moderate price gains are likely as hog supplies tighten seasonally,
but the risk of a runaway market to the upside seems limited.