Pork Wraps

This was not a good week for pork packers. Hog prices increased
sharply, with WCB negotiated prices up $9.25 to average almost
$109/cwt and the NDD price was $8.24 higher. At the same time, the
cutout was softening, dropping about $2.55 from the week before.
That put a big squeeze on margins and pushed them down to less
than $10 per head. The forecast has margins dipping into the red
next week by about $3/head. Packers can’t be too happy about this
situation. As a result, they have slowed down the Saturday kill, with
this Saturday estimated at 97,000 head and my guess is that next
Saturday could be closer to 50,000 head. All of this has created a
strange market dynamic where cash hog prices are rising, but softer
demand is pushing the cutout lower. It is a huge headache for
futures traders who get all bulled up one day by a strong negotiated
price print and then slapped back down the next day by a weak
cutout print. The two effects have largely offset one another and thus
held the LHI in the $98-100 range for the past 3 weeks.

Once again, it was the bellies that provided the majority of the decline
in the cutout this week, but there was also some help from the loin
primal. The bellies have yet to make another major leg down but I
still think that could be in the cards sometime soon. Hams are
helping to shift the focus away from bellies now as they appear to
have turned lower and that creates a lot of concern. We are still
getting wild moves in the ham primal based on how much boneless
product is included on any given day, but the basic bone-in, 23-27
pound ham has been tracking lower since late last week. Some think
that there are still hams that need to be bought and processed for
Easter, but I’m not so sure about that. The forecast has hams trading
sideways to modestly lower over the next few weeks. The strongest
part of the carcass right now is the rib primal, which has been in a
pretty solid uptrend since last October.

The combined margin moved lower again this week, signaling some
further softening of demand. I’m expecting this downcycle to be a
short one, perhaps only lasting 2-3 more weeks, before grilling
season demand starts to kick in. Pork has to contend with much
cheaper beef now for retail ad space and normally beef is the
retailer’s first choice when it come to spring features. If I’m right
about the bellies taking another step lower in coming days, then it is
easy to see how the cutout could move back below $100. It is not
that far from it right now, after printing $102.55 on Friday afternoon. If
it does move back below $100, wouldn’t expect it to trade under $95.
Instead, more of a sideways pattern might develop for a few weeks
until the spring demand kicks in enough to lift it back into triple digits.

I think the pork cutout futures are vastly over-estimating how high
the cutout could get this summer, but I recognize that part of that is
predicated on the idea that there are serious disease problems in
the WCB region and when traders hear the words “disease
problems”, they buy first and ask questions later. This week’s
slaughter came in at 2.475 million head. That was about 30k more
than what the pig crop projected, but it helped to offset a 30k deficit
last week. Thus, in the first two weeks of the March/May quarter,
kills have been almost dead-on with the pig crop estimate. The
flow model suggests that kills should move under 2.45 million head
starting next week and remain below that level until the middle of
August. Going forward from here I think it will be a battle between
shrinking kills wanting to lift prices and softer demand that wants to
push prices lower. The supply side will probably win that battle and
move prices higher as we move into summer, but don’t expect the
cutout to exceed last year’s summer top near $135.

I’m thinking that a top around $115 is more likely this summer. Of
course, if the disease problems are worse than imagined and kills
drop well below the pig crop-implied, then we could stand a chance
of reaching last year’s top in the cutout. USDA released export
numbers for January this week and they indicated a 15.8% YOY
decline. That is largely driven by much smaller shipments to China
and I don’t hold a lot of hope that movement to China will improve
anytime soon. Imports, on the other hand, were quite strong, up
34% YOY. However, smaller pig crops in recent quarters leading
to smaller YOY kills here in the first half of 2022 will be the
dominant factor keeping per capita availability down 3-5% YOY in
the first two quarters.

Normally, that would point to higher prices than the year before, but
the demand structure in 2022 is expected to fall well short of the
phenomenal demand seen last year. The futures curve was higher
this week, with the biggest gains coming in the summer contracts.
Nearby Apr held in the $100-103 range for most of the week as
traders tried to determine whether stronger negotiated hog prices
would dominate a softer cutout in the LHI or vice versa. That
remains an unanswered question at this point. Next week, watch
the hams for further price erosion. It will be really difficult for the
cutout to make significant gains as long as hams are softening.
Also, don’t be surprised if the bellies express further weakness.