Pork Wraps

It was more of the same this week in the US hog and pork complex,
with most hog and pork prices continuing to leak lower and thus
forcing the futures traders to reconsider their pricing of the Dec
contract. The cutout lost $1.75/cwt. on a weekly average basis and
the NDD negotiated hog market was down $1.88/cwt. Packer
margins also dropped a bit, now at $11.45/head. The LHI hasn’t
yet fully registered all of this week’s decline, but once it does, it
should be close to $86. The Dec futures traded at that level a few
times this week, but by late week it was clear that, with everything
trending lower, traders weren’t comfortable with $86 and the
contract settled just above $84 on Friday. That still isn’t leaving
much cushion for a contract that still has over three weeks to trade.
It is close to my estimate of fair value, but only because I have the
index moving down below $84 and then rising back to that level as
expiration approaches. I could be wrong about that we might just
see hog and pork prices continue to track lower right into expiration.
This week it was the loin and belly primals that were the biggest
drag on the cutout. Consistent declines in the loins forced me to
move the forecast lower for that primal through the end of 2022.
The softness in belly prices wasn’t that big of a surprise, but they
are now getting down to a low enough level that some users might
find it attractive to freeze them for use next spring. The down
move in the loins concerns me the most because if demand is
softening now for loins, it probably won’t be long until it also softens
for the butts. Hams have been a huge pillar of support for the
cutout over the past several months, but this week they ticked a
little lower, with the biggest losses coming late in the week.
If the hams are now starting to track lower, it will be very difficult to
move the cutout higher in the next few weeks. Another concerning
feature that arose this week was a significant softening in trim
prices. The 72s lost over $11/cwt. on a weekly average basis and
the 42s dropped over $7/cwt. Pork demand appears to be
struggling at present and this can be clearly seen in the combined
margin chart as well as the demand scatter for Q4. The combined
margin is at its lowest level since the fall of 2020 and it is at a level
that rarely visits. Domestic ham demand has probably peaked
now that Thanksgiving is upon us and Christmas is just around the
corner, so any further improvement in ham demand will likely have
to come from our international trading partners. The forecast has
both the ham primal and the cutout continuing lower in the next
couple of weeks and there is a risk that the slide could extend even longer.

This week’s slaughter came in at 2.61 million head and very
well could be the peak kill of the fall season. Obviously
packers wanted to build some inventory ahead of next week’s
holiday-reduced kill expect that to be only 2.25 million head. It
would make sense then that the best chance for some
improvement in the cutout will come in the week following
Thanksgiving when packers are still a bit short on product.
Look for kills in the 2.5-2.6 million head range during the
weeks between Thanksgiving and Christmas. This was a “big
Saturday” week and that lifted the kill above what the pig crop
implied for this week. However, it still looks like total slaughter
for the Sep/Nov quarter will come up about 250k shy of what
the pig crop implied. Barrow and gilt carcass weights were
unchanged in this week’s data release and the daily weight
data makes it seem like weights are running a little light. It
seems like hog producers are remaining current in their
marketings although pricing in the negotiated hog markets
seems to have cooled down a bit. Export demand continues
to run softer than last year and that will likely remain a feature
for the foreseeable future. There has been no indication in the
weekly data that China is stepping up purchases of US pork as
they sometimes do at this time of year. That just makes the
softening in domestic demand all the more important. Corn
prices remain elevated and hog producers are losing about
$25/head on every animal that they sell. Poor producer
margins are normal at this time of year and producers hope to
recoup the losses in the spring and summer when supplies
tighten and demand is much better.
It seems pretty certain that supplies in the first half of 2023 will
be smaller than this year, given that the breeding herd has
been in contraction mode for several quarters now. However,
we must question whether or not demand next summer can
live up to the high bar that was set in the summer of 2022.
Next week, watch the cutout early in the week for signs that
the market is struggling to digest this week’s large production.
Hams will be the key. If they continue to work lower then
expect the cutout to be down and keep in mind that the futures
still haven’t built in much downside cushion for the LHI in a
period where kills are big and demand is soft. The market may
need to correct that if it becomes clear that the cutout wants to continue lower.