Pork Wrap August 12
The pork cutout took another step lower this week, dropping $3.46/
cwt to average $123.34. Unfortunately for packers, the cost of
hogs going into their plants increased this week. The LHI was up
only $0.40/cwt, but the WCB negotiated market gained $3.61/cwt.
The falling cutout combined with rising hog prices caused packer
margins to crash from about $9/head last week to a little less than
$1/head this week. What’s more, I’m expecting margins to go
negative by several dollars next week as the cutout continues to
ease, yet cash hogs remain stubbornly firm. The turn lower in the
cutout has been led by the hams. The bellwether 23/27 lb bone-in
ham has moved from $121/cwt at the end of July to $105/cwt in
today’s print. We are also seeing bigger volumes of hams traded
in the spot market, and that is likely a sign that the stout pricing in
late July was caused by bigger-than-normal commitment to deliver
hams that took them out of the spot market.
Whether that was an export or domestic commitment is unclear,
but with volumes now rising, it appears that source of demand has
faded. Fortunately for packers, the bellies have held up well while
the hams have been on the defensive over the past couple of
weeks or else the cutout would have been down a lot more. The
bellies did slip some this week and I suspect that they are living on
borrowed time, with further, and probably bigger, price declines
just over the horizon. As far as the retail primals go, the butts have
had a tremendous reset over the past few weeks with the primal
price dropping from $160/cwt down to $126/cwt this week. We
always expect some price increases over the summer when
supplies get tight, but the move that the butts put in this summer
was very impressive. The butt primal is now back to last year’s
level and should continue to ease lower in the weeks ahead as
kills expand. Loins have held together very well and will likely be a
post-Labor Day favorite for retail features.
Ribs have been in steady decline for weeks, but could stabilize in
late August as retailers square up their needs for Labor Day
promotions. So, as I look across the cutout over the next several
weeks, I see it being dragged lower primarily by a reset in the
bellies and some further erosion in the hams. The retail items
should contribute to the decline in a much smaller way. The
combined margin has made a solid turn lower now, signaling a
new downcycle in demand. The recent upcycle was stronger than
expected, mostly because hams got so strong in the spot market.
As demand fades lower, packers will need to find some way to
pressure the negotiated market lower or else they face the
prospect of an ugly September. Margins for hog producers have
been stellar lately, holding in the $30-35/head range for the past
month or so.
It may be Oct 1 or later before hog producers have to worry about
margins going negative. This week’s kill came in at 2.34 million head,
which was only a tiny fraction larger than last week’s total. The normal
seasonal pattern tells us that kills should be expanding more rapidly than
that, but it seems as though the hog supply isn’t large enough to allow
that to happen just yet. Once again, this week’s kill was smaller than
what the Dec/Feb pig crop implied and my forecast has it falling short
again next week. As we approach the end of the Jun/Aug quarter, it is
looking like cumulative slaughter will be about 500-600k below the pig
crop estimate. USDA will need to get their revision pencils sharpened for
the next Hogs & Pigs report. I have the peak kill this fall at 2.61 million
head in the second week of November. The risk to that forecast is that it
might be too high because it is entirely possible that USDA overestimated the Mar/May pig crop also.
The seasonal increase in supply should keep downward pressure on the
prices for almost all parts of the carcass between now and November,
but don’t take that as a given. We have seen times in the past when a
strong demand upcycle in October or November produces impressive
price gains even though pork production is steadily increasing. Barrow
and gilt carcass weights held steady this week, which was a bit of a
surprise given how high temperatures have been in the Midwest, but I
don’t think that weights have found a bottom just yet. That may come in
a couple of weeks. USDA released the trade data for June this week
and it showed pork exports down about 6% YOY. That wasn’t a surprise
to anyone since we have known for months that exports are much softer
than in 2021. The weekly data issued since June doesn’t suggest that
there has been any big improvement in the interim. Pork imports
continue to run strong, with the data for June showing a 24% YOY
increase.
By the time we get the import data for August, the big YOY increases
should have dissipated, but only because we will be lapping the point in
last year’s calendar where imports started to surge. The Aug LH futures
expired today just a touch under $122 and that probably marks the top in
the LHI for this year. Traders will now focus on October which is trading
near $100. That is a long way for the index to travel in just two months,
but it has done it before. If LHI is going to reach $100 by October, there
will need to be some sharp price corrections in the processing items, as
well as negotiated spot hog prices, to help it reach that goal.
Deteriorating macro conditions this fall are also a key piece of the puzzle
that would take the LHI and cutout back into double digits. Next week,
watch for the bellies to give up more ground, perhaps in big chunks.
Packer margins should go negative, so watch the daily kills for signs that
packers might be tempering slaughter levels in an effort to preserve what
little profitability they have.
