Pork Wrap October 21
This week saw the pork cutout stall, averaging $102.46/cwt.,
down $0.23/cwt. from last week’s average. A $102 cutout in late
October is pretty impressive, but what is even more impressive is
the renewed strength in cash hog prices. This week the WCB
negotiated market averaged $97.38, up $6.75 from the week
before. The NDD negotiated market was up $4.37. A flat cutout
combined with rising hog prices spells trouble for packer profits.
Packer margins declined about $2/head this week to $17, but all
of the increase in the cash hog price has yet to be reflected in the
LHI, so I’m looking for margins to drop another $4 or so next
week. Over the past five years, packer margins near the end of
October have averaged about $26/head, so it is very clear that
margins are well below normal this year. Packers have only 2
choices if they want to fix their margin problem: raise pork prices
or lower cash hog prices. It seems to me that they might not
have much power to do either, so they may just have to live with
below-normal margins for a while.
It is hard to see how they could add much to the cutout in the
current environment where kills are close to annual highs. This
week, loins and hams exerted the most downward pressure on
the cutout, but that was mostly offset by strength in the picnic and
belly primals. I’m expecting both the bellies and hams to ease a
little next week, so that may be enough to move the cutout lower.
I think we should still see another week or two of the cutout
averaging over $100, but soon it will slide into the upper $90s,
where it is likely to spend most of the remainder of 2022. The
combined margin was a little higher this week and, while it seems
that we should be in a demand upcycle, it is hard to see where the
additional strength will originate from. Producers are likely to gain
a little margin from packers due to the strong cash hog market,
but that doesn’t help the combined margin.
I could be wrong about the bellies and hams and we may see
further strength there, I guess. I think packers will have a strong
incentive to try and push pork prices higher early next week to try
and compensate for the stronger hog market. Whether or not they
are successful with that attempt remains to be seen. The fact that
the WCB negotiate market is still being quoted near $100/cwt in
late October tells me that the hog supply is pretty tight in that
region. That fact alone should be pretty bullish for the hog and
pork complex in the next few weeks. In the past when cash hog
prices were stubbornly high, packers have seemed to find a way
to raise pork prices. Maybe that will be the case again this time.
It is pretty clear that packers are having to compete more
aggressively to fill out their kill schedules than they have at they
have at this time of year in the past.
The same situation is occurring in beef, resulting in much smaller margins
than what packers have become accustomed to. This surprising lateyear strength in the hog market has really kept the futures market on the
move. Today, the Dec contract traded very close to $90 for a period of
time. A little over two weeks ago it was trading at $74. The rally in Dec
over the past two weeks has been impressive and it wiped out everything
that Dec lost when the market swooned in September. The back of the
futures curve has taken notice too, and we saw the summer 2023
contracts gain close to $6 this week. Those issues still look a little
under-priced relative to the fundamental forecast, but the fall 2023
contracts are now $8-10 above the fundamental forecast. USDA had
some issues getting reports out in a timely fashion this week as one or
more packers were late in submitting their daily data. That problem now
appears to be corrected. This week’s slaughter registered 2.57 million
head, up 20k from the week before. This was a “big Saturday” week and
that meant that packers over-killed the pig crop slightly.
Still, for the Sep/Nov quarter as a whole, so far the kill has only fallen
short of the pig crop by a little over 100k. Not a big miss, and not much to
be concerned about. Next Saturday’s kill should be smaller and we may
see the total kill drop back to 2.55 million head. The Mar/May pig crop
projects the maximum weekly kill this fall at 2.61 million head, so we are
getting really close to a top in slaughter levels. Hog carcass weights
were one pound higher this week, but that is typical for this time of year
and the DTDS weights aren’t indicating any problem with hogs backing
up in the system. Low water in the Mississippi River system has
hampered efforts to export corn and we are now seeing cash corn in the
Midwest go discount to the futures for the first time since early June.
Even so, corn costs for hog producers are way higher than in recent
years and are likely a big factor discouraging expansion in the hog
production sector. Hog and pork prices in China have been steadily
increasing and that has raised hopes that soon Chinese buyers will
increase their orders for US pork. Some of the recent strength in the
deferred futures is probably linked to trader hopes for stronger pork
exports to China in 2023. It is possible that we could see improved
interest from China over the next few weeks as the deadline for shipping
pork to arrive in time for the Chinese New Year moves closer. Next week
watch the early-week cutouts closely for signs that packers have been
able to coax more money out of pork buyer to help cover their higher hog
costs. Keep an eye on the negotiated hog markets also, because the
longer they remain at these elevated levels, the more bullish the outlook
becomes.
