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 December 10

2020 and 2019 the cutout hit a flat spot from late November into
early December before turning lower in the last few weeks of the
year. I suspect that we will witness a similar pattern this year too.
The fact that the negotiated hog markets have moved higher in
the past couple of weeks has given hope to futures traders that
perhaps a new uptrend is now in place. That is possible, but I
suspect that the negotiated markets will struggle between now
and the end of the year if the cutout works lower as expected.
None of the primals posted significant gains or losses this week.

Hams got a big boost from strong boneless ham volumes on
Wednesday, but by the end of the week that effect had dissipated.
The outlook for hams has them trading lower into year’s end. The
chart below shows that in the last 14 years there has not been a
single year where the ham primal hasn’t been lower at the end of
December compared to where it started the month. I fully expect
that to be the case again this year. And, as the hams go, so goes
the cutout. That is the primary factor driving my forecast that has
the cutout working back toward $80 by year end. To be sure,
there are some parts of the carcass that are holding value pretty
well. Butts are one and ribs are another. Unfortunately, they
don’t make up a large enough percentage of the carcass to keep
the cutout afloat if the hams head south. Bellies also come to
mind as a potential source of strength for the cutout, with that
primal up about $10 from the low it made two weeks ago.
However, processing demand for bellies is generally pretty
lethargic during the holidays, so I’m not expecting them to rocket
higher anytime soon.

They could show some modest gains from here however. Export
demand continues to be soft. USDA reported an 8.2% YOY
decline in October exports this week. My guess is that November
and December exports will be down double digits and maybe as
much as 20% lower than last year. So, while pork production is
certainly smaller than it was last year, a lot of that benefit is being
negated by the slowdown in exports. Further, there has been a
surge in pork imports. In October, imports registered 35% above
last year. The net effect is that per capita availability during Q4 is
almost the same as it was last year. However, the cutout is about
$10 higher than it was in Q4 last year. That gives a pretty clear
picture of how much this year’s extra domestic demand has been
worth in Q4. That domestic demand strength is fading now that
stimulus money is in the rear-view mirror and vaccines have
allowed many consumers to resume normal lives.

The cutout demand index peaked in Q2 at 1.23, dropped to
1.16 in Q3 and for Q4 I’m projecting it to be around 1.13. I’d
expect that demand erosion to continue into Q1 unabated
unless the new COVID variant is able to evade the existing
vaccines and forces consumers back into the “stay-at-home”
mode that gave us the huge demand boost in the first place.
Balancing against that rather bearish demand outlook is a
rather bullish supply picture. USDA pegged the pig crop that is
now being killed down 6% and that should keep hog and pork
supplies quite snug over the next few months.

However, we are two weeks into killing that summer pig crop
and already the kills have been almost 200k above what the pig
crop implied. Maybe the hog supply isn’t as tight as
advertised. The fact that negotiated hog prices turned higher
over the last couple of weeks tends to support the idea that
some supply tightening is occurring. This week’s kill came in
at 2.6 million head, down from 2.66 million the week before. I
see a pretty big kill coming our way next week—perhaps 2.67
million head—as packers try to get a little ahead of the holiday
weeks. Once we get beyond the holidays, the pig crop points to
kills around 2.5 million head per week or slightly under. That is
when we will get the best read on whether or not USDA was
accurate with their pig crop estimate. Barrow and gilt weights
gained another pound this week and likely will add another
pound next week before flattening into January. Weights are
not excessively heavy, but they are not light either, and that is
adding to pork production.

The hog producing regions in the Midwest have seen
unseasonably warm temperatures over the past couple of
weeks and that is forecast to continue at least another week.
Anytime producers can dodge bitter cold weather in December
it is going to improve weight gains. So, if we look on the
surface at a 6% smaller summer pig crop, then yes it looks
pretty bullish, but when we consider the weight situation and
the fact that kills are already running higher than advertised,
that takes some of the luster off of the bullish supply argument.
Next week, watch the hams for possible price cracks and daily
kills for indications that the weekly total will be larger than what
the pig crop suggested once again.

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