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 May 21

Pork packers have done a superb job of reclaiming their margin after it
almost went to zero three weeks ago. They figured out that all they
needed to do was to cut the Saturday kill down to almost nothing and
suddenly their margin began to improve. This week it stands at $11/
head, which is outstanding for this point in the year. The kill reduction
has helped the cutout move higher (up $3.67 on a weekly average basis)
and the cash hog market move lower (WCB down $4.33 on a weekly
average basis). Both the cutout and the negotiated cash hog market
figure into the LHI calculation and I estimate that the LHI is currently
about 2/3rd negotiated hogs and 1/3rd cutout. That means the LHI is
going to have a hard time advancing further as long as the negotiated
market is on the defensive.

The cutout made a big jump today and that ignited a futures rally that
saw the Jun contract exceed $114.50, more than $3 over today’s LHI.
Now it is possible that that the negotiated market could turn higher, but
the way it has moved steadily lower tells me that we have already passed
the tightest hog numbers. Further, if the cutout stalls or turns lower,
there will be very little hope of turning the negotiated hog market higher
because packers will be back in margin management mode. I guess a
good question at this point is, “What are the odds of the cutout stalling or
turning lower?” Given that the cutout has only declined one week since
December, the odds don’t look very good, but all of the last-minute
Memorial Day business is complete now, so there could a little let-up in
demand next week.

All of the primals were higher this week except hams, and those made a
fairly strong recovery on Friday. The logical place for price weakness to
develop would be in the retail cuts—loins, butts, ribs as demand at retail
scales back post-Memorial Day. But there is really no guarantee that
demand at retail fades after the holiday. This is a very unusual demand
situation that we are in and it feels more like demand is permanently
moving to a new, higher level than simply cycling up and down every
couple of months. Retailers are not balking at paying a $120 cutout
because their customers are not balking at paying whatever price they
slap on pork in the meatcase. Still, from an analyst’s perspective, it is a
lot easier to forecast a declining cutout from these super-high levels than
it is to forecast it continuing higher.

I’m looking for a modest decline in the cutout during June, but have it
holding above $109 until the end of the month. The combined margin
gave a hard head fake about three weeks back and is now continuing
higher. It has double-topped like that before and when it did, it signaled
some softening shortly thereafter. I’ve included the price-quantity scatter
diagram below for the month of May and you can see how incredibly
strong demand has been this year.

Pork demand is also being supported by really high beef and
chicken prices. It seems to me that when one of that trio starts to
soften substantially, the other two will follow. Since pork is the one
that got this demand party started back in the winter, it is a good
candidate to turn lower first. Today’s big increase aside, I’m not
sure I’m ready to look for the hams to appreciate much in the nearterm and the bellies are not acting like they will make a big move
higher either. Together, those two primals represent about 41% of
the carcass, so it may be hard to get much more cutout
appreciation without help from those processing items.

This week’s slaughter came in at 2.39 million head, about flat with
the week before. It’s hard to compare against last year, but
slaughter for this week in 2019 was actually a little smaller than
what was posted this week. Weights are almost identical to where
there were at this point back in 2019. So, there is not much that is
abnormal about the supply picture at this point. Kills usually reach
their annual lows around the end of June, so we have about five
more weeks where slaughter levels should be declining. Based on
the prior pig crop, I’m forecasting the slaughter low point to be
about 2.33 million head. That is only 60k lower than this week’s
slaughter. So the end of shrinking hog supplies is within sight.
The labor problems that are plaguing the beef industry are also
present in the pork industry, but they are having less of an impact
in pork due to where we are in the seasonal supply cycle. That will
change in the fall when hog numbers swell to the annual peak and
it will be interesting to see if pork packer margins blow out to
incredibly high levels, the way beef margins have, when the supply
of animals swells late in the year. My guess is that they will.

Hog producers had better hope that pork packers get their labor
issues sorted out before Q4 gets here. The recent pullback in the
corn market has given hog producers a little relief, but the futures
are still projecting breakevens this fall in the mid-$80s. That is
about where the Dec contract finished this week. Next week,
watch for some softening in the retail primals and possibly the
cutout. It could be a down week if the cutout loses ground next
week. Stratospheric markets like the one we are in now need to be
constantly fed bullish news in order to keep climbing.

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