Pork Wraps

Remain abreast of the hogs & pork markets with our weekly Pork Wraps written by J.S. Ferraro EVP, Research and Analysis, Dr. Rob Murphy.

Pork Wrap April 23

As usual, both pork prices and hog prices moved higher this week.
The cutout was up $2.25 on a weekly average basis while the WCB
negotiated market was almost $6 higher. That was enough to
move packer margins down below $15/hd and those margins will
get even smaller next week when the full brunt of the cutout and
WCB advance is registered in the Lean Hog Index.

On the supply side, there wasn’t really very much unusual about
this week. Barrow and gilt carcass weights held at 215, which is
where they have been for the past 9 weeks now. The weekly kill
totaled 2.47 million head, which is right on schedule with where the
Sep/Nov pig crop indicated. Corn prices surged higher this week,
with the May contract now over $6.50/bu. That is starting to eat into
producer margins by raising their cost of gain, but the cash hog
price is rising even faster, so I doubt many hog producers are
overly concerned about high corn prices right now. That will
change quickly if the cash hog markets ever stop going up. The
seasonal tightening in hog supplies is becoming evident now.
Negotiated hogs in the WCB market sold for almost $113 today.
That is the highest price on record outside of the spring of 2014,
when the PEDv outbreak sent hog prices briefly into the $125-30
range. Packer margins are compressing.

As supplies get smaller between now and early July, a real margin
risk exists for packers if the cutout ever stops going up because
they might not have enough leverage to pressure the cash hog
market lower and preserve their margin. Right now I’ve got packer
margins going slightly negative in July and averaging a little less
than $5 per head in June. That assumes the cutout comes down
some, but not a lot, from current levels. Outside of the crazy period
last spring when COVID was disrupting the industry, packer
margins haven’t been in single digits for almost 2 years.

Producers, on the other hand, are enjoying astounding margins
over $35/hd, so you can see why high corn prices are not a huge
issue for them at the moment. The combined margin continued
higher again this week and is now challenging the top that it made
last fall in that very strong demand cycle. My guess is that the
current cycle is going to shoot way beyond last fall’s peak and
remain very elevated for weeks or even months. I really don’t know
what else to say about the demand side of this market other than it
seems to be originating with domestic consumers and is
extraordinarily strong.

The chart below indicates that all of the primals were higher
this week on an average basis, with the ribs and hams leading
the way. Ribs I can understand because there are a lot of
those used in foodservice applications and that sector is
rebuilding inventories. Plus they are a favorite retail feature
items across the Southern US in the spring. The persistent
strength in hams however, is a bit perplexing. The 23/27 lb
hams averaged almost $92.50 today, which is extremely high
for a bone-in ham at this time of year.

Of course, cold storage stocks of pork in general are well
below normal levels. This week USDA reported total pork in
cold storage at the end of March was down 27% from last
year. Hams in cold storage are down 31% and belly stocks
are 55% lower than last year. Those low stocks are forcing
some buyers into the spot market that would normally be
drawing from the freezer in spring and summer, so it is very
much price-enhancing. Bellies showed a little softness toward
the end of the week, but with stocks so low, I really don’t
expect belly prices to drop sharply anytime soon. That
probably means that the cutout doesn’t fall apart either and so
buyers had better get used to paying a lot more for pork than
they are accustomed to.

The real danger, as I see it, is that demand stays superelevated right into July when hog supplies are shrinking
seasonally. In that scenario, it wouldn’t be all that surprising to
see the cutout and cash hog prices both top $125. The
futures bulls would have a heyday with that. Those bulls are
already having an extended party, particularly those that
adhere to the front of the curve where the rising cash markets
have forced the futures higher and higher. The May contract
set a life-of-contract high today at $109.45. I will say that the
futures are very jumpy and volatile at these high levels. Any
little hitch in a daily cutout print seems to send the futures
down several dollars, particularly the Jun contract. Next week
watch for further advances in the cutout and negotiated hog
market as a sign that this rally still has life. My guess is that it


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