Pork Wraps

The pork market got back on its downward trajectory this week,
with the cutout dropping $4.13/cwt to average $105.18. Cash hog
markets were higher, with the WCB negotiated market rising
$2.81 and the NDD up $0.86. The LHI gained almost $1 to
$102.20. Hogs up and pork down is a bad combination for
packers and this week their margins fell to $4/head from $14/head
the week before. The drop in the cutout was almost entirely
sponsored by the belly primal as the attached chart indicates.
Belly corrections are often severe and scary for market bulls and
this one has been both. The futures market has undergone a
significant correction, with the Jun contract losing over $12 this
week. As scary as the belly correction has been, it is important to
keep in mind that the other primals seem to be holding value quite
well. I would be much more concerned if this was a broad sell-off
affecting all of the primals. Bellies will soon find a level that starts
to attract buyers.

I think maybe one more week of softness and belly prices should
begin to recover. Hams continue to do very well and what the
bulls need to hope for is that the hams continue to hold up until
the bellies can get back on track. If both show weakness
simultaneously, that would be a real problem. The retail primals—
loins, butts, ribs—have been sideways to higher recently and I
suspect that is due to consumers trading down from beef to pork
items in the retail environment. That isn’t likely to last forever and
eventually we will see demand soften for those items, but for now
they are providing a much needed ballast against the volatility in
the belly and ham markets. This week’s action removed most of
the mis-pricing from the front three contracts. More overpricing is
likely to come out of the deferreds as they get closer to the front of
the curve.

Pork demand is likely to follow the same path that beef demand is
on right now (weakening back to pre-pandemic levels), but
because of the trading-down effect, the impact on pork will
probably be a few months behind beef. Pork, unlike beef, has the
advantage that kills will be declining seasonally over the next two
months and that should prove to be price supportive. This week’s
slaughter registered 2.4 million head, up about 30k from last week
and about 60k more than what the pig crop suggested. I’d expect
that packers temper the kill next week in an effort to limit further
margin erosion. The combined margin chart indicates that the
little bump up in the combined margin in the previous 2 weeks
was a head fake and it is now back on its downward trajectory.
My guess is that it at least touches the zero line before it starts to
improve.

Of course, there is a risk that pork buyers will pull back next
week after the big downdraft in hog futures and the huge sell-off
in the stock market. If they do, that might take a few more dollars
off of the cutout, but they can’t stay on the sidelines forever,
particularly during grilling season. One might think that hog
producers are doing pretty good with the LHI at $102, but their
breakevens are only about a dollar below that, so they aren’t
seeing much in the way of margin currently. That is the problem
with a declining demand environment—there isn’t enough margin
in the system to go around. For the next two months, packers
and producers will be arm-wrestling for what little margin is
available. Carcass weights were reported one pound lower this
week and that could be the first step in a seasonal downtrend
that will take weights progressively lower from now until
Independence Day.

There doesn’t seem to be any abnormalities with weights
currently. There must still be some lingering disease problems in
the WCB market because prices there have been erratic again
this week. However, I don’t think it is going to turn into a largescale shortage of hogs. Exports are still very soft compared to
last year and that is important to keep in mind when considering
domestic supplies this summer. We know that the pig crop that
will be slaughtered from June to August was reported down 1%
by USDA, but much weaker exports this year (and stronger
imports), could cause Jun-Aug availability to be as much as 2%
greater than last year. So we could see a summer where pork
availability is larger than last year, yet demand is way softer than
last year. That is why I haven’t been a proponent of super-high
pork pricing for summer.

The cutout is expected to be in triple digits for sure, but likely not
into the $120-130 range that the futures have wanted to project
for so long. Instead, buyers should be thinking about summer
cutouts in the $100-$112 range. I think the risk to that forecast is
that actual cutouts turn out to be lower, rather than higher, than
the forecast. Sow pricing moved lower again this week, but it is
still very high in a historical context. Trims are also very high and
that is a big supporting factor for sow prices. It is just another
example of consumers trading down to cheaper protein sources.
Next week, watch the bellies for signs that they are making a
bottom, since that will likely determine the direction of the cutout
and the mood in the futures market.