Pork Wraps

This was a week for treading water in the hog and pork complex. There
was very little overall change in the cash market variables. The
negotiated market was $1.08 higher in the WCB and $2.48 higher in the
NDD market. The LHI gained a paltry $0.80 and the cutout lost $0.74.
The one thing that didn’t tread water was the futures, where the nearby
Apr contract shed almost $3.50 to finish the week below $100 for the first
time since early February. Speculative traders are apparently growing
frustrated with a market that has no discernable direction and perhaps
are opting to look for greener pastures elsewhere. That leaves less
buying interest to offset commercial hedge selling and thus the futures
move lower. The pullback brought the Apr futures closer in line with my
fundamental price forecast, but my guess is that the futures will have at
least one or two more runs higher before expiration. Slaughter this
week was estimated at 2.44 million head, which was almost dead-on
with what the Sep/Nov pig crop projected.

Three weeks into this quarter and cumulative slaughter has been very
close to what USDA’s survey suggested, helping to inspire some
confidence about the production forecast for the next couple of months.
We should see 2-3 more weeks of kills above 2.4 million head per week
and then they will take another step lower. Packer margins however,
might be the fly in the ointment for kills over the next few weeks. I
calculate this week’s margin at $5.90/head, which is the smallest since
late June of last year. Further, if my cutout forecast is close to correct,
then margins could very well print in the red next week. That might
prompt packers to do a little more maintenance on their plants in order to
slow production and thus hopefully raise the cutout to a level that will
cover the increasing cost of hogs. On the other hand, packers have
worked hard to fully staff their plants post covid and might be reluctant to
schedule downtime that would idle new hires. Packers have already
trimmed the Saturday kill back substantially, with this Saturday coming in
at only 58k, compared to last March when Saturday kills averaged over
110k. There are just not enough hogs to support kills of that size.

It makes me wonder if this might encourage packers to move further into
the hog production sector. They added a lot of new capacity a few years
back and now producers aren’t cooperating by keeping the hog supply
large enough to efficiently utilize all of that capacity. Packers may
decide that the only way to guarantee that they can run their plants at
high capacity utilization is to raise more of the hogs themselves. Of
course, when a packer integrates back into the production segment, he
takes on the producer margin, which is pretty unpredictable and with
corn prices near all-time highs, it could become a bigger drain on
finances than simply running the plant below capacity. However, as of
this moment, producers are making more per head than packers, which
is pretty unusual for this time of year. I have producer margins this week
at almost $11/head. Barrow and gilt carcass weights seem to have
plateaued around 216 pounds, and that is pretty normal for this time of
year. The DTDS weights don’t suggest any problems in the hog pipeline,
but they also don’t suggest that packers are pulling excessively hard on the available supply.

There is still talk circulating about higher disease prevalence this year that seems to be centered in the WCB region. High negotiated prices coming out of that region seem to confirm that there is unexpected tightness there, but overall kills are lining up closely with pig crop estimates, so that
doesn’t seem to support huge disease losses at a national level. The
current demand cycle seems to be leveling, using the combined
margin as a guide. It has been trending lower since mid-February and
moved sideways this week. It could be carving out a bottom, or it
could be just stalled for a bit and will resume its downtrend next week.
The cutout has not softened as quickly as I had originally imagined.
Hams are weakening now and may stay that way for another couple of
weeks, but the bellies have been pretty resilient after the big drop that
shaved about $25/cwt off the primal a few weeks back. I had thought
that perhaps they held more downside risk, but the primal actually
moved higher this week.

It’s not unusual for a pullback in the bellies to be interrupted by a week
or two of strength, so I’m not yet ready to call the bellies higher. I
have, however, moved my expectation for the bottom upward in recent
forecast revisions. Loins are another item that have been softening
lately, but soon retailers will want to run those more frequently to
capture some grilling demand and thus I don’t think they hold a lot
more downside risk. Butts and picnics are risk higher as the weather
warms. The sow market broke the $90 mark this week and is actually
running a bit above last year’s exceptional pricing. If consumers are
trading down as inflation rages, then we might expect the sow market
to perform very well this spring and summer. Back in April of 2014
when disease problems were causing significant supply problems, sow
prices actually breached $100 and that is the highest they have ever
been. Right now the cutout has some primals rising and some falling,
so the cutout itself has been drifting lower only very slowly.

Demand could continue to soften, but smaller kills in the weeks and
months ahead may provide enough support to overcome softer
demand and thus move the cutout upward. Futures traders are
currently valuing the June pork cutout futures near $122, so that
suggests that most believe the seasonal decline in pork production will
be very supportive to pork prices this spring and summer. My
forecasts for summer hogs and pork are well below what the futures
are currently implying, but given the recent developments in the
relationship of cash hogs to the cutout, I may need to reduce my
packer margin forecast this summer. Right now, I’m expecting $6-7/
head positive margins, but if those margins actually turn out to be
negative, then it would be much easier to get cash hogs or the cutout
to a level more consistent with the futures. Next week, keep an eye on
the bellies because a price drop there would greatly increase the
bearish sentiment that has been creeping into the market lately.