Pork Wraps

Negotiated cash hog markets improved a little bit this week, with
the WCB up $1.46 and the National market quote up $0.86. The
Lean Hog Index added $3.32 to average a hair over $104. Most
of that gain was due to the delay in the previous week’s stronger
cutout and cash hog pricing flowing into the index. The cutout
continued on its upward trajectory, gaining $3.76 on the week.
Once again, it was the bellies and hams that provided the loin’s
share of the strength. Packer margins held almost steady at
$4.84 per head. The futures market was higher across the board,
with the bigger gains coming in the Jul and Aug contracts. At one
point this week the Jun contract was trading close to $111.50,
which seemed a bit excessive given that the LHI at $104 and only
two weeks until expiration. Jun finished the week at $110.40 and
the question of whether or not the LHI can get there by expiration
will largely hinge on how the cutout performs in the next couple of
weeks.

And, of course, how the cutout performs will depend on what the
bellies and hams do. My fundamental forecast has both primals
trading higher over the next couple of weeks, but not strongly
enough to take the cutout high enough to justify $110 on June. I
think that perhaps something closer to $108 is more likely. The
combined margin chart has been higher now for two weeks in a
row and so I’m going to take that as confirmation that a new
upcycle in demand is underway. This one may be short and isn’t
likely to get nearly as high as some of the upcycles we saw during
the pandemic years. Retailers will be restocking early next week
following the holiday weekend and that alone could boost the
cutout a little, depending upon how good their clearance is. Of
course, those retailers won’t be buying bellies and hams, which is
where the real action will be.

Processors will be snapping those up, dependent on how they
expect demand to play out over the next couple of months. All of
the normal demand headwinds remain in place: inflation, high
retail pork prices, post-pandemic spending shifts, etc. so I still
think the longer-term trend toward softer demand remains an
important market feature. It may not be very visible during June
since we are in a local demand upcycle and production will be
declining, but from mid-summer onward, I’d expect the softening
demand story to be back near center stage. This week’s
slaughter clocked in at 2.35 million head, just a little smaller than
last week’s strong number but still well above what the pig crop
implied. We have now completed the March/May quarter and it
looks like the industry over-killed USDA’s estimate of the Sep/Nov
pig crop by about 340,000 head.

Now the important question is whether or not those over-kills will
persist into the Jun/Aug quarter. That is when packers begin
working on the Dec/Feb pig crop, which USDA estimated to be
down 1% YOY. I’m projecting the Jun/Aug slaughter total to be
about 1.5% below last year, but I may be too low on that. Actual
pork availability might be slightly better than last year during the
quarter, depending on how the export market performs. The
weekly export data showed a nice uptick in shipments last week and
we saw China take the largest weekly total so far this year. I want to
see more confirmation of growing volumes into China though before
I’m ready to declare that Chinese interest in US pork is improving.
With all the lockdowns, port congestion and macroeconomic
softness that China is facing it doesn’t seem likely that they will
ramp up their imports of US pork materially from current levels.
Mexico seems a better bet as a growth market for exports this year.

This is the time of year when the focus is largely on the supply side
of the hog market. Everyone knows that hog supplies tighten
between Memorial Day and Independence Day and there is also the
potential for exceedingly hot weather which can slow weight gains
and thus limit supply. The prior pig crop leads me to believe that the
smallest non-holiday kill this year will be close to 2.25 million head.
That is really only about 100,000 head smaller than this week’s kill,
so the impact of smaller animal numbers on the kill is probably only
modest at this point. The weather/weight impact on production
remains to be seen, but so far this year temperatures in the Midwest
have been relatively mild. Barrow and gilt carcass weights were
reported down one pound this week to 216 pounds, so it looks like
the normal seasonal decline in weights is now underway.

My expectation is that weights will decline toward a bottom in the
209-210 pound range sometime in early-to-mid July. Futures
traders seems to have curbed their enthusiasm a bit. No longer is
there danger of them running the summer contracts up to $125 just
because the cutout advances for a few days in a row. In fact, if I’m
right about $108 being an appropriate expiration value for June,
then that could have a chilling effect on the futures as Jun declines
heading toward expiration. Next week, watch the bellies and hams
as always—those are the big movers. Also keep an eye on the
projections for next Saturday’s kill because that will have a big
impact on how long the effect of the holiday persists in the market.