Pork Wrap July 2
A couple of weeks ago when the futures market was crashing lower,
pork buyers headed for the hills. As they backed away from the
market, the cutout fell like a rock and it even printed close to $107
only a little over a week after it printed $135. At the time, that
seemed like too much, too fast, to me, but that buyer behavior is
pretty common when they sense the market is in a freefall. Now, the
panic is gone from both the futures and pork markets and things
seem to be a little more rational.
The cutout this week averaged close to $3 higher than it was last
week. A further indication that the initial fall was too much, too fast.
Don’t get me wrong, I do believe that the hog and pork complex has
topped and is now in a downtrend. But driving the Jul futures down
to $100 just days after it traded $120 was definitely too much, too
fast. That is what happens when fear takes hold. Pork buyers have
seen the Jul contract rebound almost $9 in the last six trading
sessions and that has quelled some of the fear. It is safe to say that
the sudden, huge drop in the cutout destabilized the entire complex
and it will take some time for things to calm down. I don’t think that
pork demand at the consumer level has declined nearly enough to
justify the big drop in the wholesale market, but consumer demand is
likely softening and will eventually get there. The really curious thing
about all of this is that it took place when hog and pork supplies were
at their annual lows.
This week’s slaughter registered only 2.28 million head and next
week there is a good chance that it will be less than 2.0 million due
to the July 4 holiday. Further, carcass weights are coming down
rapidly now, which further tightens the pork supply. This little spell
here in early July where production is constrained has the potential
to support the cutout and may even give it a boost back up toward
$120. Cold storage stocks are still very tight and puts more buyers
into the spot market than normal. With the nearby futures now rising
instead of falling, that gives pork buyers “permission” to pay up when
needed. The chart below indicates that it is still the bellies and hams
that are providing support to the cutout. The retail items all look to
be in a solid downtrend, but they could blip higher next week as
retailers look to restock after the long weekend.
As we move beyond the holiday period, I expect further erosion
in pork demand, in part because consumers now have plenty of
other things to do rather than cook pork at home and in part
because retailers have now pushed retail prices so high that it
is likely to curtail retail movement. Those things will swing the
demand pendulum back toward weaker demand, but it won’t
happen all at once. Instead, I’d look for slow steady erosion
that lasts for several months.
Another troubling development on the demand side is that
China appears to be losing its appetite for US pork. The weekly
export numbers show dismal movement to China in recent
weeks and new purchases by the Chinese are falling rapidly. I
don’t think that we can get enough new demand from other
export destinations to offset the loss in volume to China, so that
means per capita availability will likely expand and prices could
soften. Thus, the demand side outlook in this market has
dimmed considerably, but we won’t likely feel the full effect of it
until later in the month when we get past the short production
weeks and kills start to expand seasonally. The long steady
uptrend that started in late December and saw the cutout go
from $70 to $135 by the middle of June was one for the record
books for sure, but it is over now.
In my experience, it seems that periods of exceptionally high
prices tend to be followed by periods of exceptionally low prices
or vice versa. Packer margins rebounded to +$2/head this
week after registering -$15/head the prior week. Packers have
found it easier than I expected to push the hog market down in
response to the falling cutout and futures. Maybe now that they
are back near breakeven, the pressure on the negotiated hog
market will subside for a bit. Next week, watch the cutout for
some upward movement due to holiday-reduced production
and retail restocking. Also keep an eye on the daily kills and
prospects for next Saturday’s kill. This could be a really light kill
week ahead.
