Pork Wrap May 14
The pork cutout inched a little higher this week, adding $1.56 on a
weekly average basis. In the cash hog market, the WCB
negotiateds added only $0.33/cwt, while the LHI was up $2.25.
The bigger gain the LHI compared to the negotiated market reflects
some catching up that the LHI needed to do following last week’s
strong rally in the negotiated market.
Packer margins moved about a dollar lower, now close to $4/head.
Last week, packers did very little in terms of a Saturday kill and I
suspect they may do even less this week. They are having
difficultly staffing plants and margins are not great anyway, so why
not let the Saturday kill go to almost nothing. By my estimate, this
week’s kill should come in very near 2.4 million head, which is not
all that different from last week’s total. It is however, about 30k
below what the pig crop implied. So, with two weeks to go in this
pig crop quarter, the kill is running 80k below the pig crop and that
may slip another 20k between now and the end of the month. So,
hog slaughter is beginning to tighten down seasonally.
Carcass weights are also starting their seasonal descent. This
week’s weight data showed a 1 pound drop in barrow and gilt
weights and the IA/S. MN liveweight data suggested the FI weights
will print lower again next week. The DTDS weight is now
registering -3, which is very low and an indicator that hog
producers are current on their marketings. Thus, I don’t really see
any surprises on the supply side of the market. Negotiated hog
prices have slipped off of their highs by about $3 in recent days
and that may indicate that a near-term top has been made in the
negotiated market. However, it is certainly conceivable that cash
hog prices resume their march upward as hog supplies tighten
further in June and July.
On the demand side of the market, we are seeing very strong
demand for the retail cuts—loins, butts, ribs. The weak sister in the
cutout is the ham primal, which has dropped $10 over the past two
weeks. The combined margin chart made a goofy little bend higher
this week, so I’d say that we are still inconclusive as to whether or
not the current strong demand cycle is nearing its end. Even bellies
managed a modest gain this week, up about $3.50. We are really
close to the point where the Memorial Day buying dries up and I
suspect that the retail cuts will start to ease lower once that point is
passed.
That means that the cutout could soon start moving south,
although I don’t expect that it will do so at a strong clip. Instead,
I’d look for a $1-2 drop in the cutout, on average, each week
between now and the end of June. That would still leave the
cutout somewhere in the $105-110 range moving into the first
week of July.
I’m expecting packer margins to work lower from here and turn
modestly negative in June. In the context of the LHI, the lower
cutout is bearish, but the smaller margin is bullish and those just
about wash each other out so that the LHI remains in the
$108-111 range through May and for most of June. Grain
markets came crashing down near the end of the week and that
took some of the air out of the deferred hog futures. However,
grain futures are at that point in the calendar when volatility is
near its annual high, so I think we can expect to see many more
wild swings, both up and down, in the corn and soybean markets.
That will move the deferred hog futures up and down as well.
Export markets also seem to be stuck in a sideways pattern, with
reported shipments running around 40k MT per week, outside of
the weeks where reporting anomalies cause spikes. Even
shipments to China remain in the same sideways pattern they
have been in for most of 2021. It is actually pretty impressive that
international demand has been able to hold steady in the face of
rising US pork prices this spring. That may be an indication that
this strong demand environment is not limited to just the US, but
is part of the fundamentals in many other countries. Next week,
watch the hams for signs of further deterioration and be prepared
for a topping in the retail cut markets.
