Pork Wrap October 1
The big news in the hog and pork complex this week was a $7+ surge
in the cutout (weekly average basis) that was driven primarily by strong
gains in the hams and bellies (chart below). The remaining primals
were pretty much steady on the week. The cutout gains were
impressive considering the size of last week’s kill. That makes me
pretty confident that pork demand has entered a new upcycle. The
combined margin chart has been suggesting that for a couple of weeks
now, but the move this week really solidified that idea.
The turn higher in demand wasn’t too far off of the normal 8-week cycle
that has been typical in the past, since demand last peaked around
early August. Hams are seeing demand strength from processors
looking to fill needs as the holidays close in and also from Mexican
buyers. My guess is that we could see 2-3 more weeks of stronger
ham pricing before demand for hams starts to abate. Bellies and
hams seem to be closely aligned their price cycles right now, so I’d
also guess that the bellies continue to work higher for another 2-3
weeks also. Bellies probably have more upside potential than the
hams do at this point and everyone knows how fast a rally in belly
prices can lift the cutout. However, just because demand is in an
upcycle it doesn’t necessarily mean that prices are going to soar from
this point forward. Supplies will also have a say. Kills are set to grow
seasonally from now until mid-December and that will be the counterbalance that probably keeps price levels below the peaks seen earlier
this summer.
This week’s kill was a bit disappointing at only 2.52 million head, which
was 50k below last week. That means availability will be a little
snugger next week than it was this week when the cutout was able to
put on $7. That makes me think that further price increases could be
just ahead. Once again, we are seeing kills fall well short of what
USDA’s pig crop estimate projected. The kill has been below the pig
crop projection in each of the five weeks so far in the Sep/Nov quarter.
The deficit over those five weeks has been almost 400,000 head. That
is almost a full day’s production. If the under-kill continues at this rate,
the industry will slaughter about a million head less than advertised in
this quarter. Recall that in the most recent summer quarter the kill was
1.3 million head less than advertised. It is pretty concerning that
USDA seems to be routinely over-estimating the hog supply now. The
recent Hogs and Pigs report pegged the Jun/Aug pig crop down 6%.
What if they over-estimated that one by a million head also? That
would imply some very tight pork availability in the upcoming Dec/Feb
quarter. There are concerns about packers having enough labor to kill
all of the hogs this fall, so perhaps a smaller-than-advertised kill would
be a blessing in disguise, particularly for hog producers.
I am a little worried that packers are already struggling to kill the
available hog supply. This week packer margins ballooned out to
over $40/head. That may pull back into the upper $30s early next
week as the LHI comes to fully reflect the gains in the cutout from
this week, but that is still a very wide margin for this time of year.
Packers seem to have no problem pushing negotiated hog prices
lower and that would also be a symptom of packing capacity being
insufficient. It may still be early in the process because we really
haven’t seen any abnormal weight gains recently and that would
definitely be a feature if producers were having trouble getting their
hogs slaughtered on schedule.
Weights are increasing seasonally, but so far the DTDS data
doesn’t indicate a backup. Stay tuned, because that could change
quickly. Since the LHI is dependent both on the cutout and the
negotiated cash hog market, we will have two opposing forces
working to move the index over the next few weeks, with the cutout
trying to pull the LHI higher and the negotiated market pulling it
lower. Right now the cutout is winning the tug-of-war and the LHI is
rising. I estimate it will print close to $95 early next week. Since
Oct only has nine trading days until expiration, that has energized
the bulls and we have seen gains in the Oct contract for six of the
last seven sessions. With next week’s production being
constrained by the smaller Saturday kill this week, I’d expect some
further gains in the cutout and that puts the Oct contract on track to
enter its final week with a LHI above $95. Much will depend on
continued strength in the bellies/hams and there is always the risk
that the bellies shoot higher as they are sometimes prone to do.
Belly volume has been very light on the negotiated pork report, so it
wouldn’t take much to move them in either direction
Exports continue to look like they are softening, but there is always
the chance that the Chinese will step up orders later this month as
they try to get ahead of the logistics logjam in order to get product
delivered in time for their New Year’s holiday and the winter
Olympics, both of which happen in early February. Next week,
watch the bellies and hams for further strength and also watch the
daily kills for signs that the packers are struggling to manage large
kills.
