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 January 14

I could say that this was yet another week where the pork cutout went
nowhere since it averaged $87.37, only $0.80 higher than last week’s
average. However, that would ignore the wild day-to-day volatility we
saw. On Tuesday, the cutout finished at $81.62 and on Thursday it
closed at $95.28. Needless to say, Thursday was a big day for
boneless hams. This was the first week in a while where the hams
and bellies weren’t the biggest influencers on the cutout. This week,
the loins came to life toward the end of the week. Butts and picnics
were a drag on the cutout this week and I’m more than just a little
concerned about those going forward. Both are typically soft in Jan/
Feb and it looks like this year they are going to follow the normal
seasonal pattern after bucking it last year. I think the other primals
will have to overcome the weakness in butts and picnics over the next
couple of weeks if the cutout is to gain any real traction.

Last week I talked about how COVID absenteeism was adversely
affecting packers’ ability to process hams and that was causing bonein hams to get dumped on the market at low prices. At one point this
week, the 23/27 lb hams were quoted below $40/cwt—the lowest in
almost seven years. Volumes on the bone-in hams were huge. A
good portion of those are likely headed for the freezer and will be
processed later when labor is more available. The bone-in hams did
eek out some small gains late in the week, but there is considerable
risk that those gains don’t stick. The bellies fared better this week,
posting their third weekly increase in a row. I see those continuing
higher and even at current price levels some users might opt to move
bellies into cold storage ahead of a stronger pricing environment this
spring and summer. The forecast has the cutout holding in the midto-high $80s for the next several weeks with bellies and loins helping
and butts and picnics hurting the cutout.

Hams are the wild card that could cause the cutout to be stronger or
weaker than currently forecast. Packers are still struggling with
absenteeism in the plants and that fact was evident in this week’s
kills. The daily kills were revised a lot this week and mostly
downward. The average weekday kill was right at 446k, compared to
about 480k per day back before Christmas. Further, packers did a
Saturday kill that was almost 100k less than last week, putting the
weekly total at a paltry 2.41 million head. This was the first week in
the Dec/Feb quarter where the kill failed to live up to the pig crop
projection. It was about 100k short of it. That will probably back up
some hogs in the pipeline, especially if packers struggle again next
week. Fortunately for producers, hog weights are not excessive at the
moment and they may be able to dial back the energy component of
rations for a couple of weeks and manage this problem without too
much price concession.

Nationally, negotiated cash hog prices were steady this week, but
the WCB region saw a $2 price increase. The LHI gained about a
dollar on the back of a little stronger cutout and now sits at $74.32.
Nearby futures moved lower early in the week as traders continued
to be disappointed by the lack of upward movement in the LHI.
However, Thursday’s $95 cutout print sent the Feb futures soaring
on Friday and pushed the contract into positive territory for the
week. I expect that it will probably take a couple more weeks
before the omicron train has run its course and plants are able to
operate at normal capacity again. This week packer margins
averaged close to $23/head, down about $1 from the week before.
I’m more than a little surprised that margins haven’t ballooned out
in response to the constriction in processing capacity

Normally we would expect pork prices to shoot higher as less is
produced and hog prices to move lower as the pipeline backs up.
Neither has happened so far. Margins are rapidly increasing for
beef, but not so for pork. It is possible that soft exports are
keeping more product at home and thus tempering the price impact
of smaller kills. There is also the Prop 12 issue, whereby all pork
sold in the state of California has to be produced from sows that are
given more space than is common in the industry. Theoretically,
Prop 12 compliant pork should sell for more than commodity pork
and as a result we should see less pork consumption in California.
That would leave more to be consumed in the other 49 states and
have a downward influence on the pork prices that go into USDA’s
cutout calculation.

From what I understand, the high-priced Prop 12 pork is not going
into the cutout. USDA is treating that more like specialty pork. Still,
no one really seems to know how Prop 12 is actually affecting the
market, if at all. This issue has been pushed into the background
by the omicron-induced labor problems, but it has the potential to
be a significant factor in the weeks and months ahead. My guess
is that it will have a moderately negative effect on the cutout and
thus on hog prices, but until we hear more from California retailers
on how the new law is working, there will be a lot of uncertainty and
speculation around this topic. Next week, watch the daily kills for
signs that the plant labor problem is improving. Expect the cutout
to average in the high $80s, with a strong likelihood of big daily
price swings.

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