Pork Wraps

Remain abreast of the hogs & pork markets with our weekly Pork Wraps written by J.S. Ferraro EVP, Research and Analysis, Dr. Rob Murphy.

Pork Wrap June 3

The hog and pork complex continued along its upward path this
week, with the cutout adding $2.45/cwt on a weekly average basis
and the NDD negotiated hog market gaining $3.15. Negotiated hog
prices are rising because of the seasonal tightness in the hog supply
that is causing packers to have to dig a little harder to fill their kill
schedules. Although some packers are probably better off than
others as far as having their kill needs met, we have seen some days
where over 20k head have traded in the spot market. If packers had
all of their formulas based on the negotiated market, then they would
be in the red right now because that market is running about $4-5
over the cutout. As it is, a good chunk of formulas are based on the
cutout and that is helping to keep the LHI just a few dollars under the
cutout and keeping packer margins slightly in the black. I calculate
this week’s margin at $7.50/head, up about $3 from last week.

I wouldn’t expect margins to get much better than that for the next
several weeks and they very well could move lower. The stronger
negotiated market and cutout from this week has yet to be fully
reflected in the LHI, but if both stayed where they are as of Friday
afternoon, the LHI would be worth about $107.50. The Jun futures
settled today at $110.20, so clearly market participants are expecting
further advances in the cutout and negotiated markets over the next
seven trading sessions before the contract expires. I think the Jun
futures are a little overdone at this point and see expiration coming in
the $108-109 range. The Jul and Aug contracts have been careful
not to get too far ahead of Jun so far. Pork demand remains in a
small upcycle, as evidenced by the attached combined margin chart,
but longer-run I think it is still in the process of reverting back to prepandemic norms. The gains in the cutout this week were generated
mostly by the retail primals, with the exception of ribs, which show a
strong seasonal tendency to peak near Memorial Day and then work

The belly primal did a lot of bouncing around this week, but in the
end, it produced an average not far different from the previous week.
Hams are the star players of the processing market right now and we
are seeing bone-in heavy hams regularly trading over $90/cwt. The
excess premium for boneless hams that was a market characteristic
during the pandemic has largely dissipated now and that suggests
that packers have their labor force back in good shape. As usual, the
hams and bellies will likely drive any big moves in the cutout in
coming weeks. I’m forecasting both higher, which means there
should be some additional appreciation in the cutout. The strength in
hams may only have another week or two to run, but the bellies could
stay on an upward trajectory into the first part of July. Right now, the
forecast has the cutout topping in the $113-114 range (weekly
average) sometime around mid-June. That might also mark the top in
the combined margin. From there, I think the cutout holds in a mostly
sideways to slightly lower pattern until mid-July.

By then, we should be back into another downcycle for demand and hog
supplies should be increasing slightly. That makes me think that pricing
in the hog and pork complex will be much softer in August than in the
June/July period. I look for the cutout to average around $103 in August,
down from a $111 average in June. Interestingly, futures traders are
currently valuing the Aug pork cutout futures about $1.50 over Jun. This
week’s kill came in at 2.04 million head, with packers killing 145k on
Saturday to help make up for the missed production on Memorial Day.
Going forward, we should expect very small Saturday kills outside of
holiday weeks until the end of July. This week’s kill was larger than the
pig crop projected, but goofy things happen around holidays with the pig
crop projected kill, especially when the holiday fall right at the end of one
quarter and the beginning of another.

The problem stems from which week the holiday falls in, so I don’t want to
read too much into this week’s apparent over-kill. Let’s see what happens
next week. Barrow and gilt carcass weights were reported another pound
lower this week and they do appear to be trending lower now in normal
seasonal fashion. The DTDS weight calculation isn’t pointing to any
problems in the hog production pipeline at the moment. Nearby corn
futures have come down about $0.75/bushel since late April, but cash
corn prices in Iowa have not fallen as fast as the futures. Back in April
cash prices were solidly under the futures and now they are almost on par
with them. Producer breakevens are still clocking in at around $103/cwt
and since the LHI is now approaching $107, there is a small positive profit
on the table for producers. However, the $4 margin they are making this
year is a far cry from the $45 margin they collected in the first week of
June last year. The difference can be traced to weaker demand and
higher feed prices.

Producers are likely not in any mood to expand right now and I’d be
surprised if the breeding herd is any larger than where it was back in
March when USDA reports their survey results on Jun 29. Export
markets for pork continue to track in a mostly sideways pattern and well
below last year. Cold storage stocks are on the rise and that is likely a
sign of users feeling more confident about holding larger stocks now that
much of the pandemic uncertainty has been resolved. Those larger
stocks should help provide a buffer against sharply higher prices this
summer. Next week should be a good one for the cutout, with hams and
bellies providing most of the support and the retail items cooling off a bit.
Also, it is always important to keep an eye on the weather at this time of
year because if a heat dome builds over the production regions in the
Midwest it can cause hog weight gains to slow and thus tighten the hog
supply further. Right now, the weather forecast doesn’t seem to point to
that type of an event, but weather forecast can often change faster than a
pork belly price forecast, so stay alert.

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