Pork Wrap January 21
This week the pork cutout finally got enough traction to move above
the $90 mark. For the week, it was up $4.66 to average $92.03.
Hams were the primary drivers, with a little assistance from the loins
and bellies. Last week I noted that the hams had gotten ridiculously
cheap and would likely attract some buying attention. That seemed
to happen this week, but they also found support from light kills.
Packers did a good job of cleaning up ham inventories coming into
the week, so the light kill and low price levels made for an
environment conducive to price gains. Bellies also showed some life
this week and that may be a sign that processors are getting more
labor back on line.
Currently, bellies aren’t super cheap the way that hams were, but
they are cheap enough that some users may be building freezer
inventories ahead of tight fresh supplies this spring and summer.
Pork loins are making their way into retail ads as an attractive
alternative to expensive beef, especially now that holiday bills are
landing in consumer’s mailboxes. So there are good demand-side
reasons why the cutout is pushing higher, but we have also seen kills
constrained by omicron-related absenteeism and thus there is a
supply-side component to the recent price strength as well. Packers
managed to kill 2.44 million head this week with the help of a fairly
strong Saturday kill, but the graph below indicates that was still about
50k less that what the pig crop indicated. Back in December, kills
were running larger that the pig crop implied and that makes me think
that USDA under-estimated the Jun/Aug pig crop moderately. So, if
we hadn’t had high absenteeism in the plants over the last couple of
week, by guess is that the kills would have been larger than the pig
crop implied by about 75-100k. Given that we underkilled by about
175k in those two weeks, it implies that we likely backed up about
250-275k hogs. That’s not a huge backlog, but it also isn’t
insignificant.
The weight data is also starting to point to some backing up in the
pipeline. Negotiated hog prices have been very volatile lately,
moving up then down in big chunks, but on a weekly average basis,
negotiated prices were a tiny bit lower this week. That also fits with
the idea that there are some extra hogs in the system. With each
passing week, packers should find it easier to get back on a full kill
schedule. If they can keep hog prices contained, they may even opt
to kill off some of the backlog in the next several weeks. That is the
thought behind my forecast next week for a kill around 100k over
what the pig crop suggested. A couple of weeks like that and the
backlog problem will be solved. The wild swings in daily hog prices
has made it difficult for futures traders to identify the trend in those
markets, so instead they have just focused on the cutout which has
been mostly up.
The Feb futures gained over $5 this week and the Apr were up
more than $6 as a rising cutout brought the bulls back out. But even
the cutout is difficult to decipher, often swinging $5-10 from
morning to afternoon. To help bring some clarify that problem
somewhat, I created a “core” cutout that is comprised of one item
from each primal that is minimally processed (so that labor is not a
big factor) and weighted those items according to the percentage
each primal contributes to the cutout. Trim is also included. The
chart below indicates a strong move higher in the core cutout
recently, going from around $90 to near $100 at the close today.
So we have evidence that this recent move is solid and not just
based on a shifting mix of products.
My guess is that improvements in labor availability over the next
several weeks will cause the core cutout to track more steady than
uptrending. With the cutout rising and the cash hog markets
steady, packer margins added about $6/head and are now close to
$29/head. That makes it the largest margin ever for this point in the
calendar. Normally margins soften in January and February in
response to seasonally softer demand, and I expect that will be the
case this year as well. The forecast has packer margins averaging
around $26/head in January and $19/head in February. In fact,
margins should continue to work lower from now until mid-July in
response to a seasonal downtrend in hog numbers. It is worth
noting that international demand for US pork is looking pretty weak
right now, compared to recent years. Fortunately pork production
is also smaller, so that has helped to offset the impact of having to
move a greater percentage of production in the domestic market.
Demand in the domestic market seems okay, but not great.
The combined margin did turn higher this week, so maybe we are
finally going to get that demand upcycle that has been anticipated.
However, the bar chart below plots the cutout demand index by
month and you can see that demand here in January is at almost
the same level it was last January. Thus, the YOY difference in
pork prices is being driven more by constrained supply than
exceptional domestic demand. At this time last year demand was
mediocre but “great pork demand surge of 2021” was about to
begin in February. Now it looks like demand is back close to presurge levels. The combined margin chart gives that impression
also. Next week, keep an eye on the daily kills for signs that the
labor problem is easing. Also, watch the weekly weights for signs
that hogs are backed up.
