Pork Wrap December 3
On a weekly average basis, the pork cutout was essentially
unchanged this week, but Friday-to-Friday it was down $2.61.
Cash hogs rallied strongly this week, with the WCB negotiated
market gaining over $9 and the NDD market up nearly $7 Fridayto-Friday. Of course this begs the question as to why packers
would be paying so much more for cash hogs at a time of year
when kills are near their peak and cutout values are struggling. I
don’t have a good answer for that other than perhaps the supply of
hogs is tightening and packers have commitments to fill. The
WCB market jumped almost $4 today and as this week’s higher
hog prices flow into the LHI, it will pressure packer margins.
This week margins averaged a little over $29/head, but that could
drop below $25/head next week. On Monday morning, I’m pretty
sure packers will be telling buyers that they need to increase
asking prices for pork because their input costs are going up.
Whether or not buyers go along with that remains to be seen.
Packers will have a lot of product to move next week given that
the kill totaled 2.67 million head. That is the largest kill this fall
and probably marks the seasonal peak. After under-killing the pig
crop significantly during the Sep/Nov quarter, now the first two
weeks of the Dec/Feb quarter have seen a 200k over-kill. It is still
early, but we have to be thinking about the possibility that USDA
may have under-estimated the summer pig crop. However, the
fact that the negotiated hog market is moving rapidly higher
doesn’t fit well with the idea that there are more pigs than
expected out there.
FI hog weights were flat this week, but will probably increase at
least a couple more pounds before they top in late December.
The DTDS weights do not suggest that hog producers are highly
current, which makes the sharp rise in cash hog prices even more
difficult to understand. Packers are scheduled to kill 265k
tomorrow, which is about 100k less than they did last Saturday as
they were playing catch-up from the Thanksgiving holiday. This
week’s kill may be the largest of the season, but kills will stay large
into January, excepting the holiday weeks. Bellies and hams
moved in opposite directions this week, with bellies showing some
strength and hams continuing lower. If the bellies are really
starting an new uptrend, it would be pretty unusual because they
typically weaken into the end of the year. Hams normally crash
lower during the last half of December, but they are already so low
that it is hard to imagine that this year’s December drop will match
those of years past.
So, this unusual price behavior in the processing items has left
observers scratching their head as to the likely direction of the
cutout in the next few weeks. I am among them. My
fundamental forecast basically has the gains in some areas
offsetting the losses in other areas so that the cutout holds in
the mid $80s over the next few weeks. My sense is that the risk
to that forecast is on the downside. Now, we can extend that
thought to the LHI, which has its own conundrum as negotiated
hog prices move higher while the cutout potentially moves
lower. Friday was a good example.
Negotiated hogs were quoted $4 higher and the cutout was
quoted almost $7 lower. This is confounding trader’s efforts to
forecast where the Dec futures will expire in just 7 trading days.
The cutout is only a few dollars above where it was last year at
this time, yet the weekly kills have been coming in 3-4% below
last year. The difference this year is that China has really
reduced its purchases of US pork, leaving more to be disposed
of in the domestic market. The current forecast has per capita
disappearance during Nov/Dec up about 3% from last year.
Fortunately for packers, demand is much stronger this year
than it was last year or we might be looking at a cutout in the
mid $70s instead of the mid $80s. I do get the sense that
demand is slowly fading and expect that to continue unless the
new COVID variant ends up encouraging consumers to hunker
down at home again.
That would be positive for pork demand. It will probably be
several more weeks before we can accurately assess that risk.
There is another Hogs and Pigs report on the horizon—due out
two days before Christmas. That should provide some clarity
to the supply picture. I’m expecting the breeding herd to be up
slightly YOY, but recognize that it could be down slightly as
producers eschew expansion in this time of uncertainty. Next
week, watch the bellies and hams for direction. That is likely to
be where most of the action lies. The official export data for
October will be released next week also. A 10% YOY decline
or more wouldn’t be surprising.
