Pork Wrap July 23
The negotiated hog markets were lower this week, with the NDD
market dropping over $3 and the WCB off a little more than $5.
The cutout, meanwhile, added about $2.50 on a weekly average
basis. That helped move packer margins back up to $15/head and
it is beginning to feel like packers are in control again after that
disastrous drop in the cutout and margins back in June. This week
was all about the bellies, which have now moved to an all-time
high.
Without the strength in the bellies, it is a good bet that the cutout
would have been lower on the week. Bellies can be a fickle beast
and very volatile. Recall that it was a sharp drop in belly prices
back in June that precipitated the big decline in the cutout. At that
time, the belly primal went from around $200 to $150 in just 2
weeks. That type of downdraft could happen again at any moment
given how high belly prices are. I suspect that bellies are caught
up in a demand surge for products containing fat. Pork 42s also
made an all-time high this week. There is no telling how long that
demand boost will last, but with high corn prices it is a pretty good
bet that livestock producers are not going to feed animals any
longer than they have to and that will tend to limit the amount of
animal fat that gets produced. Other parts of the carcass are
struggling. The butts took a huge price hit this week and the loins
look to me like they may be next. In order to turn the cutout lower
we need to see increased pork production.
We are at that point in the calendar when kills begin to expand
seasonally and it looks to me like this week’s kill will be
considerably larger than last week—perhaps around 2.36 million
head. That is pretty close to what the pig crop implied (chart
to the right). By Labor Day, I expect to see kills north of 2.55 million
head. If that doesn’t turn the cutout lower then it will be time to buy
everything in the complex with both hands because something very
unusual is going on. Hog weights are currently approaching their
annual lows and this week’s data confirmed that they haven’t
started to rise yet. That will come in August. The DTDS weights
are at all-time lows, which tells me that hog producers must be very
current. It is a mystery why the negotiated market has been
printing lower in recent days if hogs are so light and current.
Now that packers have a decent margin once again, perhaps
they will focus on increasing the kill and that might stabilize the
negotiated hog market. Right now, the LHI seems to be stuck
around $112 as higher cutout values are being offset by lower
negotiated hog prices. My forecast has the LHI beginning to
move lower in the next couple of weeks, that means that Aug is
likely to expire well above where traders thought just a few
weeks back when it ventured into the high $90s. I guess we
shouldn’t be surprised by that since traders at one point were
pricing the Jul contract at $100 and it ended up expiring at
$112.
I see the price declines accelerating between the Aug and
Oct expirations. The cutout futures are valuing the cutout at
$103 in October and that just looks way too high for me. Kills
will be much larger then and the hogs will be heavier. I favor a
cutout in the low $90s for October. If I’m right about that then
the LHI might trade in the low $80s since with
expanding supplies we would expect packer margins to be
relatively wide in October. One sharp belly pullback like we saw
in June would quickly correct that problem. The export
data released Thursday morning wasn’t very encouraging.
Net new sales to China were negative, meaning there were
more cancellations than new sales. Movement was pretty
good to Mexico and Japan, but if China is withdrawing from
the US market then I’m afraid it will leave a hole that is too big
for other destinations to fill.
It seems that recently the futures have spent the early part of
the week pumping up the deferred contracts in response to
the rising cutout but then when Thursday arrives the export
data throws a wet blanket on the party. Next week, watch the
bellies and hams. They are the main drivers of the cutout at
this point. Any stumble in either one of those has the potential
to greatly alter the psychology of this market.
