Pork Wraps

The hog and pork complex continued to work higher this week, and
it definitely felt like a lot of work. The NDD negotiated market was
up $1.48/cwt through Thursday and the cutout was up $1.43/cwt.
Traders got a bit of a scare on Wednesday when the belly primal
printed sharply lower, but it bounced back on Thursday, and all was
well. It wasn’t the belly primal that provided support for the cutout
this week. Instead, it was the mighty butt primal with some help
from the hams. I’m not quite sure what lit a fire under the butts over
the past few weeks, but it has outperformed all of the other primals
in terms of percentage price gains. The two likely sources of
strength would be either a major retailer preparing to feature butts
heavily for Father’s Day or Independence Day or S. Korea sucking
them out of the domestic market. Either way, the gains in butt
prices came at an opportune time and probably kept the cutout from
slipping lower over the past few weeks.

I don’t see the strength in butts continuing much longer, perhaps
another week or two, and then I’d expect butt pricing to move back
more in line with the other retail primals. My presumption is that,
going forward, the bellies will provide the primary support for the
cutout, but I have to admit that right now that theory looks a little
shaky. Demand for bacon is very inelastic and so it is normal for
belly prices to rise and kills shrink in the summer. Bacon also sells
well through foodservice channels and I am expecting that
foodservice business will be brisk this summer as consumers travel
like crazy now that COVID fears have faded. Just because the belly
rally hasn’t taken hold yet doesn’t mean that it won’t, so I will hold
out hope for the bellies a little longer. Hams are getting very
expensive, with the primal printing over $98 on Thursday afternoon.
I think it can hold that level, but wouldn’t expect it to advance much
beyond it. So, hams may provide temporary support for the cutout
while the bellies are getting organized for their rally.

At some point in the next 2-3 weeks, we could see a hand-off from
the hams to the bellies and that could keep the cutout firm. I’m
forecasting the cutout to average over $110 for the next 3-4 weeks
and that should put us past the smallest kill of the year. The
negotiated hog market has shown no signs of backing down and
we’ve seen quotes near $120 for several days now. I’m nervously
watching for the heat dome that the weather service says is forming
over the hog production regions. That has the potential to bring
excessive heat to hog barns in the Midwest, slowing gains and
forcing packers to compete even harder for the available hog supply.
In my opinion, this potential weather event is the most important
factor to watch for in the next few weeks. If I’m wrong on the nearterm price forecasts, it will likely be that I was too low because the
heat wave cut production and thus drove prices higher than
expected.

Pork packer margins were about -$1/head this week and I suspect that
margins will get worse before they get better. This is just a fact of life for
pork packers that margins are soft in the summer. The industry must
have enough packing capacity to handle the seasonal surge in hogs each
fall and so they have built toward that goal, but this creates an overcapacity problem in the summer when hog numbers are seasonally tight.
Packers are forced to compete vigorously for those hogs that are
available, driving up cash hog prices and sending margins into the red.
USDA is set to release its summer issue of the Hogs and Pigs survey in a
little less than two weeks. I am looking for it to show the breeding herd
about flat with what they reported in March and 2% below last year. I’m
calling the March/May pig crop down 1% as improving productivity helps
to offset the 1.9% smaller breeding herd that was available to produce
that pig crop.

So, from what we already know about past pig crops and my
expectations for the breeding herd on June 1, it is safe to say that market
hog availability should be down about 1% YOY for the balance of 2022.
Of course, exports are expected to be way down this year (the current
estimate is 6% below last year) and so that will take some of the edge off
of smaller domestic pork production. In the end, it seems likely to me
that 2022 per capita domestic pork availability will be very close to what
we saw in 2021 but price levels should be lower because of the demand
fade coming out of COVID. I’m expecting total hog slaughter this week
to be close to 2.35 million head, which would be 3.6% below last year.
My guess is the kill will continue to shrink until we see a sub 2.3 million
head kill in late June or early July and that will mark the smallest nonholiday kill of 2022. By the end of August, kills should be back near 2.5
million head per week. Barrow and gilt carcass weights ticked higher
this week to 215 pounds, but the data was for the holiday week, so that
isn’t too concerning.

Weights seem to be pretty normal and in a good spot right now. That
may turn out to be fortuitous if a heat wave sets in. At least we won’t be
starting out with excessively light carcass weights. Jun futures expired
on Tuesday at $108.57, a little more than $8 over where May expired. I
suspect that Jul will expire a lot closer to Jun than May did, but the wild
card is the weather over the next couple of weeks. I guess I’m a little
surprised that traders haven’t run the Jul contract further out in front of
the cash index in anticipation of potential supply tightness due to
weather. Either way, that puts the weather forecast firmly at the top of
our watch list for next week. A close second will be to watch the belly
primal for signs of life that could put the cutout in position to exceed $110
for a few weeks.