Pork Wrap July 9
The pork cutout looks like it will eek out another small gain this
week, probably less than $1 on a weekly average basis. Very
light production as a result of the July 4th holiday is helping to
support the cutout currently. Packers are not planning a very
large Saturday kill this week, which is a reflection of seasonally
tight hog supplies. By keeping the kill constrained, they hope to
push the cash hog market lower while supporting the cutout and
thus improving their margin. They made good headway this
week, with the margin increasing to almost $8/head from just $3/
head the week before.
Once again it was the processing items, hams and bellies, that
provided support to the cutout while the retail items were flat or
lower. This is the time of year that ham processors start looking
to begin purchasing for their end-of-year holiday needs. They
are going to find price levels this summer well above what they
have experienced in the past two years, but stocks of hams in
cold storage are about 17% below the long run average, so more
product will need to come from the fresh market this year. Some
buyers may try to wait longer than normal this year under the
hope that bigger production near the end of summer will push
prices lower, but that is a dangerous game because processing
capacity is so tight this year due to the labor situation.
If they wait too long, they may find that they can’t get all of the
hams they need processed in time for the holidays. As a result,
many will likely just pay what they have to in the spot market and
that should keep the hams fairly well supported over the next few
weeks. The cold storage situation in bellies is even worse, now
about 40% below the long run average. That suggests that
bellies won’t come crashing down in the near-term either.
Americans are traveling again and a lot of bacon gets consumed
in foodservice settings so I would expect that belly demand holds
fairly strong at least until mid-August. The retail items will be
vulnerable as production increases next week and I expect that
effect to outweigh the support provided by the bellies and hams,
thus the cutout should ease lower.
Pork demand is still very good by historical standards (see
July scatter below), but it is slowly fading as the pandemic
recedes and people find other things to do besides cook at
home. Export demand also seems to be softening,
particularly from China. That is pretty worrisome, given the
large proportion of US production that gets exported
(26-30%).
This week we got the official export data for May and it
showed an 11% improvement over last year. That was way
bigger than what the weekly data suggested. I think the
June and July data will show single-digit YOY increases, but
am concerned about what might happen if Chinese demand
continues to drop off in the next few months. It bears close
watching, but unfortunately quality data that is timely on
exports doesn’t exist.
I’m projecting this week’s kill to come in at a little over 1.9
million head, but expect packers to bounce back with a 2.39
million head kill the following week. By the time August
rolls around, weekly kills should be solidly above 2.4 million
head and could reach 2.55 million head just ahead of Labor
Day. Barrow and gilt carcass weights are now 4 pounds
below last year and 2 pounds below 2019. High corn prices
have likely contributed to the sharp drop in hog weights this
summer, since the weather has not been overly hot.
Small kills + light weights = small production and that is
what the industry is experiencing at the moment and is likely
why the cutout is being supported in the mid one teens.
That will start to change as we move out of July. Kills will
grow and weights will increase seasonally as the weather
starts to cool. If I’m right that demand will continue to fade
over time, then we have the perfect recipe for lower hog and
pork prices from August through December (increasing
supply, decreasing demand).
