Pork Wrap May 7
The cutout turned back higher this week, adding $3.36 on a weekly
average basis. Cash hogs also moved higher, with the WCB
negotiated market up $4.68. The turnaround in the cutout was helped
along by some modest improvement in belly prices, which had been a
source of softness over the last couple of weeks. The belly primal
added about $5 on the week. The rest of the carcass continues to look
strong, with the exception of the hams.
The ham primal was down about $3 on the week, but I don’t want to
conclude that the hams are going to enter into a long-run downtrend. I
think it is probably just a bit of a breather for the hams, much like the
bellies just took and soon processors will be back to bidding them up.
I’ve got the ham primal forecasted to peak at just over $100 ahead of
Memorial Day and after that they should start to work lower. Packer
margins improved this week to about $6/head, but that is inflated
somewhat by the fact that the full impact of the higher negotiated hog
market hasn’t yet been registered into the LHI. Once that happens, I’d
look for margins to be closer to $4/head. This rapid compression in
margins has definitely caught packer’s attention and this week they
responded by slashing the Saturday kill down to a mere 15,000 head.
That moved the weekly total down to 2.41 million head. I’m sure they
are hoping that will boost the cutout next week and I suspect they are
right on that. Cutting the kill right in the midst of prime grilling season
demand is going to force some pork buyers to pay more than they
would like. Another side effect of cutting back on the kill is that it might
cool down the red-hot cash hog market. It dipped a little on Friday, but
my guess is that it would take several weeks of constrained kills to
have a material impact on cash hogs. Hog weights finally printed lower
this week, with barrow and gilt weights down one pound to 214. As of
today, the weather forecast holds cooler-than-normal temperatures
throughout the midsection of the country for the next week or so and
that should be supportive to hog weights in the near term.
However, hot weather is inevitable as we head into summer and that
will start to push weights lower and become a drag on overall pork
production for the next 2-3 months. With the arrival of June, the
industry will begin killing the Dec/Feb pig crop, which was estimated to
be down 3% from last year. So, both hog numbers and hog weights
are moving in the direction of tighter pork production. Demand remains
phenomenal. Just look at the scatter diagram below for the month of
May. The 2021 data point is actually further off of the regression line
than the point for 2014 when the industry was dealing with sharply
reduced production due to PEDv. With supply shrinking and demand
super strong, I was forced to raise price forecasts yet again this week.
I’ve now got the cutout continuing to work higher until just after
Memorial Day, when I would expect some of the seasonal
demand pressure to let up and thus prices could start to erode
some. I don’t think the market is going to go into a large-scale
freefall however. There are just too many buyers out there that
are in hand-to-mouth mode right now and those will be greatly
tempted to step into the market on even a modest price decline.
In fact, after this week’s forecast revisions, I now have the cutout
holding above $100 until mid July. I also dialed up the demand
forecasts through the remainder of the year, because it has
become abundantly clear that this strong demand environment is
going to last much longer than originally envisioned.
The combined margin, which I use to quantify demand cycles,
turned unexpectedly higher this week after posting a sharp
downturn last week. That also factored into the decision to push
demand higher over the next few months. However, even after
increasing the demand index forecasts for the second half of
2021, the deferred futures still look way too rich. I guess futures
traders are looking for way stronger demand than I am, or else
they expect a much brighter export picture in the second half of
the year because supplies for the balance of 2021 are fairly easy
to project at this point. Some of the enthusiasm for deferred hogs
may be arising from a commodity price inflation play.
Prices of all commodities, except cattle, are now quite elevated.
Corn seems to be leading the way, with the nearby May contract
settling at $7.72/bushel today. With feed prices so high, hog
producers will need to see hog pricing this fall much stronger than
normal in order to avoid financial disaster. The hog futures
market is offering them that opportunity right now and they can
hedge very strong pricing right through Q1 of next year. The
official export data for March was released this week and it
showed a 3.9% gain over last year’s strong number. That was
bigger than what I had dialed in, but not large enough to explain
the strength in hog prices that we saw in March.
China is still buying a lot of US pork, but it is their appetite for US
beef that is capturing all of the attention lately. Next week, watch
the ham primal for some firming up after this week’s setback and
keep an eye on the daily kills for indications that packers feel like
they need to do more than just cut out the Saturday kill in order to
improve their margin.