Pork Wraps

Negotiated hog prices held rather steady this week as the NDD
was up $0.34 on a weekly average basis and the WCB was down
$0.14. The problem for packers was that the cutout dropped
$2.47/cwt. That shrank their margin once again and I calculate it
to be currently just under $7/head. Who would have guessed
that the week after Thanksgiving pork packing margins would be
only $7/head? The last time that happened was in 2011 and that
was a different era where $7 was a big margin. In recent years,
margins have averaged about +$31/head just after Thanksgiving.
This year it seems, there is something different about the hog
supply that is preventing packers from pushing cash hog prices
lower as they normally would at this time of year. I suspect that it
is because the herd has shrunk to the point where it is too small
for the amount of packing capacity and thus packers are having to
compete much more vigorously for uncommitted hogs. That is
not a problem that is going to go away anytime soon. Each
successive pig crop is a little smaller than the one before it and
that is likely to continue into 2023. Since its not likely that any
major packing plants will close in the near future, that means the
hog supply-to-packing capacity ratio will continue to shrink and
that should keep margins tighter than normal through most of
next year. The problem will be most acute in the middle of
summer when hog supplies are the tightest. We could see some
very red packer margins next summer. The immediate problem,
however, is that pork demand is still softening. Note the
combined margin chart. It is the same problem as with beef—
consumer demand just isn’t strong enough to provide good
margins for all of the supply chain players. This week it was the
hams and bellies that pressured the cutout lower while the retail
primals were steady to slightly higher. An important development
this week was the ham primal dropping almost $6 and that comes
after a $7 drop the week before. I am very concerned that the air
is starting to come out of the hams and they have been the main
support pillar for the cutout. We have lost $13 in two weeks off
the ham primal and we haven’t even reached the point in the
calendar when ham prices tend to crater (last 2 weeks of
December). The ham primal is still more than $20/cwt over last
year’s level and the five-year average, so there is plenty of air that
could still escape from this balloon. This week’s drop in the
bellies took that primal below the $100 mark for the first time in
almost two years. However, late in the week some of the bellies
were starting to be quoted higher. That may give some market
participants hope that the bellies are now on the upswing and that
may be true, but I want to see a few more data points before I call
the bellies substantially higher in December.

The last cold storage report told us that frozen belly stocks are about four
times larger than last year and are even larger than in pre-pandemic
years. That probably means that there isn’t much desire to put additional
bellies in the freezer now and thus more product will need to clear in the
fresh market. Also, processing activity tends to slow down during the
holidays and thus processors will try to keep their working inventories
rather low in the near term. All of that makes me cautious about expecting
significant increases in belly prices. They may not go down much from
here, but a big rally seems also unlikely. That’s unfortunate because a
rising belly market could be a nice counterbalance to a softening ham
market. Loins and butts are likely to hold in a mostly sideways pattern
until after the holidays. Pics are also carrying a lot of air, now almost $20
over last year and the five-year average. They too tend to break sharply
lower around mid-December, so that is another potential source of
softness for the cutout. After updating the forecasts this week, I’ve got the
cutout continuing to ease very slowly lower until after Christmas when
buying for early January delivery should start to raise the cutout. This
week, the cutout had the benefit of coming off of a short kill the week
before and it still lost over $2. Next week the market will be asked to
chew through the pork resulting from this week’s 2.59 million head kill, so
the supply side pressure should be a little stronger. The weekly export
numbers make it pretty clear that the market isn’t going to get a big boost
from overseas buying here at the end of the year. Barrow and gilt carcass
weights were reported a pound higher this week, which is pretty typical for
this time of year. The industry is now working on the Jun/Aug pig crop
and this week’s slaughter came in a little above what the pig crop implied,
so that is something to keep an eye on. Normally at this time of year,
producers have so many hogs to market that they are pretty much taking
whatever the packers offer in the spot market. Not this year. The supply/
capacity ratio is keeping negotiated prices elevated. The WCB
negotiated price is running $26 higher than this time last year, but recall
that last year at this time packers were struggling to find sufficient workers
to staff plants and that effectively reduced processing capacity. LH
futures sold off hard on Monday, but recovered later in the week as
traders seemed to have a change of heart and the structure of prices
makes it look like they now expect a bottom in the LHI very soon. The
steep premium on Feb points to expectations that once the bottom is in,
then prices will step higher week after week. The one thing that favors
that scenario is that the combined margin is in a zone where we might
expect a bottom soon. Next week, watch the see-saw between the bellies
and the hams. If they can stay opposed to one another then the cutout
might stabilize, but if they both jump on the same end of the see-saw it
could be jarring experience.