Pork Wrap June 11
The hog and pork complex continued higher this week with the
cutout adding $3.74 on a weekly average basis and the WCB
negotiated market up a whopping $9.40. Packer margins clocked in
at $28/head, down $2 from last week. That margin will shrink further
once the full impact of the rapid rise in the negotiated hog markets
gets fully reflected in the LHI.
Production this week bounced back from the Memorial Day and JBScyberattack-shortened kill the week before. In fact, this week’s kill
was about 60k more than the pig crop projected so that may reflect a
conscious effort on the part of packers to make up some of the lost
kill from the previous week. Carcass weights are working
seasonally lower also, further restricting production. The fact that the
negotiated hog market was so strong this week tells me that marketready hogs are tight and packers will probably have to give up a lot
of margin in the next few weeks as they chase hogs to fill their kill
schedules.
But what about the cutout? Well, there were some concerns about
the cutout late in the week as the ham primal took a dive. Ribs also
saw a good bit of softening. The weakness there was offset by
further strength in the retail cuts and a little help from the bellies as
well. However, the hams are such a big part of the carcass that it will
be difficult to keep the cutout on an upward trajectory if hams are
heading south in a major way. June and July normally see pretty
good buying interest on hams, so this week’s softness could get
reversed in the next few weeks. It looks to me like the hams are
going to trade in a zig-zag pattern for a while—a couple of weeks up,
then a couple weeks down (chart to the right). The primal found good
buying interest down around the $80 level a few weeks ago and I
suspect that will be the same this time around.
Currently, the primal sits at $87 so there could be some additional
downside risk in the near term. The ribs are a little more difficult to
ascertain, but I’m not completely convinced that they will continue
lower. Cold storage stocks of ribs are down about 67% from 2019
levels, so there will be some rib users that must remain in the fresh
market when normally they would be more of a frozen user. Ribs
have a strong foodservice presence and I suspect that demand will
be good there all summer long. So, although there are a couple of
weak spots, when we look at pork demand overall, the picture is still
bright.
The combined margin is still moving higher and not all that far from
the record peak that it made last spring in the midst of all the covid
craziness. I fully expect the cutout to breach the $137.56 all-time
high that was set back in the summer of 2014 when PEDv had
restricted hog supplies. This week we got the official export
numbers for April and it showed a 2.1% increase over last year.
However, the weekly numbers are pointing about a 5% decline in
May exports.
The way that pork prices escalated this spring, I’m actually
surprised that the May decline isn’t bigger. It does look like China
is pulling back on pork exports from the US, but interestingly, they
are eager to buy very expensive US beef. Honestly, I think export
demand has held up very well given the high price of US pork this
spring and summer. But this market is being primarily driven by
domestic demand and I don’t see anything on the horizon that
would significantly crimp domestic demand over the next couple of
months. So, with demand remaining firm and hog supplies and hog
weights expected to dwindle, it is hard not to call this market higher,
at least until supplies start to expand seasonally later this summer.
Traders are obviously concerned about the cutout and it did print
about $1.50 lower this afternoon. Still, it is important not to be too
fixated on the cutout when the negotiated markets are roaring
higher.
That is a sign of very tight hog supplies and in the end, tight
supplies will trump whatever demand softness might attempt to
develop. Packer margins should start to shrink rapidly and at
some point, they may go back into margin management mode.
They may drop the Saturday kill completely if the cutout doesn’t
keep pace with what they are having to pay for hogs. Next week,
watch the hams and ribs for signs of further weakness. Also keep
an eye on the negotiated markets because those could be the
primary driver over the next few weeks.
