Pork Wrap July 16
Prices in the hog and pork complex firmed up this week, with the cutout
gaining a little over $3 and the LHI up a little over $1 on a weekly
average basis. It seems as though all of the doom and gloom that
characterized this market a couple of weeks back has now faded. Pork
buyers backed away from the market in late June as the cutout fell, but
they couldn’t stay out of the market forever and now they are back and
have pushed the cutout back near $120 as of this afternoon.
This week, it was the bellies and loins that did the heavy lifting in the
cutout. Hams are still posting strong numbers too, but the gains there
have slowed somewhat. All of this begs the question, “Was the sell-off
back in late June just a dramatic head fake?” Possibly, but I think that
the market has peaked and is in the process of heading lower just like
the beef market, but it can’t come down as fast because we are in the
tightest hog supply period of the year. The combined margin chart
below shows an increase over the past two weeks. But rather than call
it a head fake, it looks to me more like a classic head and shoulders
chart pattern, which is considered a bearish indicator. Retailers have
now jacked up retail pork prices to a level that will begin to curtail pork
consumption at retail and that will eventually reverberate through the
wholesale market. USDA reported retail the retail price of pork for June
at $4.55, which is an all-time high. Retail prices never got to this level
during the PEDv problems of 2014, nor did they get this high last year
when COVID was closing packing plants.
If this doesn’t slow pork movement out of retail, I will be very surprised.
This slowing of demand will happen just as hog and pork supplies are
beginning to expand. The gains will be gradual through the balance of
July, but will accelerate in August to the point where the industry should
be killing close to 2.55 million head per week by the time Labor Day
arrives. Retailers will likely be slow to lower prices, given what they
have just been through over the past six months, and that sets up a
situation where wholesale prices could fall dramatically in September
and October. Helping to offset that will be the government’s latest
version of stimulus payments, which are directed at families with
children. Lower income households will receive a minimum of $250 for
each child, each month, for the next 12 months.
That is a substantial boost and there is a good chance that the
Democrats will extend the payments for several years to come in a
separate bill yet to be passed. Families are typically big meat
consumers and so this money will hit in a good spot for the pork
industry. We should watch closely to what happens to red meat
demand over the next couple of months as these new payments get
incorporated into family budgets.
If this spring provides any indication, it should have a strong
positive impact. I wouldn’t look for the program to return pork
demand to the levels that we saw this spring, but it will probably
keep it higher than pre-pandemic averages. International demand
for US pork is beginning to look like it may be in trouble. The
weekly export data has been weak lately and movement to China
has been declining rapidly.
Net-new sales to China in this morning’s report were actually
negative, meaning that there were more cancellations than new
sales to that destination. This bears close watching because the
export market is currently absorbing more than 30% of US pork
production and if China goes back to importing minimal amounts of
US pork, it will leave a lot more that needs to be consumed through
domestic channels (at lower prices, of course). So, the
fundamental tea leaves for the hog and pork complex are a bit
murky at present. On one hand we have very small kills and light
carcass weights propping up the market, but both will be expanding
soon. We have weakening domestic and international pork
demand, but also a new government spending program that could
boost pork demand. Rapidly declining beef prices will also tempt
retailers to shun pork in favor of beef over the next couple of
months.
My guess is that the overall direction of prices for both hogs and
pork is lower, once July is behind us and maybe sooner. Once the
tightness in supply starts to fade, I think the lower price trend will be
more evident. Near-term however, we could easily see a few more
dollars added to the cutout and cash hogs before that turn takes
place. Futures traders apparently see it the same way, as the
August hog contract, which becomes the nearby tomorrow after
July expired today, is trading about $8 under the current index.
The August cutout futures are pointing lower also, down around
$112. Next week, watch for some softening in the cash hog
markets. That would indicate that the packer’s near-elimination of
the Saturday kill is causing producers to fall behind on their
marketings. Also, watch the belly primal because that seems to be
the main mover of the cutout recently.
