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 October 28

The main feature in this week’s market was the cutout dipping
below the $100 mark for several days and averaging $2.86/cwt.
less than last week. There were some interesting dynamics
within the carcass and within the week however, starting with the
surprising bump higher in the belly market on Friday. Prior to
Friday, the bellies had been trading softer, but someone
managed to sell a good quantity of 13/17 lb. bellies at $205 on
Friday morning and that caused the belly primal to jump.
However, the bellies that traded Friday afternoon were much
closer to the $160/cwt. level that had been common earlier in the
week. So, while that might have been an anomaly, it did allow
the cutout to finish the week back in triple digits. On a weekly
average basis, the belly primal was down about $3.50 this week.

Another important feature in this week’s market was the
continued slide in the loin primal, making it the biggest drag on
the cutout. That is probably a sign of some pork fatigue starting
to set in at the retail level. Hams also lost ground this week and
that is probably due to less demand from domestic processors
who are now up against a tight timeline in order to get hams
processed in time for the holidays. Trims were the bright spot,
with both the fat and lean trim up around $3 on a weekly average
basis, but trims make up a much smaller part of the cutout
calculation than do the other primals. When it was all said and
done, the cutout posted an average of $99.59 for the week. Last
year at this time, the cutout was about $5 lower than where it is
now. On the surface, that would seem to indicate that pork
demand is still robust, but when we take inflation into account,
the picture isn’t so rosy.

The attached scatter diagram gives the demand curve for
October calculated using CPI-deflated price levels and we see
clearly that demand was stronger in October 2021 than it was
this year. In fact, demand looks really soft compared to recent
years. That fits with the combined margin, which is also on the
defensive and signaling weak demand. If we have a $99 cutout
on weak demand, imagine where it will go when demand enters
its next upcycle, which I would expect to begin in the second half
of November. The forecast has the cutout easing lower through
most of November and then strengthening modestly into
December. One place where there is definitely not weak
demand is the negotiated hog market. The WCB market
averaged $97.22 this week and was nearly steady with the week
before. I think the strength in the negotiated hog market is
simply a sign of the hog supply being too small for the available
processing capacity.

As a result, packer margins this fall are much narrower than in recent
years. This week’s margin is estimated at $9.86/head, well below the
$27/head that packers were realizing last year at this time when labor
constraints were reducing processing capacity. The Lean Hog Index
averaged over $94 this week and the cutout is just shy of $100, so it is
easy to see that margins are tight for this time of year. I think that is
going to continue and may get worse as we go into 2023 because
USDA’s surveys have been telling us that the hog herd is going to stay
on a downward trajectory at least for another six months. This week’s kill
was reported at 2.56 million head and this was a “small Saturday” week
in the context of the oscillating weekend kills that are clearly visible on
pig crop implied chart.

Next week will be a big Saturday and we could even get the weekly kill
up to 2.61 million head, which should be the practical top this fall.
Except for Thanksgiving week, we should look for kills to hover in the
2.55 to 2.62 million head range until early December. By January, the
weekly kill should ease back into the 2.4-2.5 million head range. Hog
weights were steady this week, but they still could add 3-4 more pounds
before they hit their annual top. The DTDS weights continue to tell a
story of relatively current market hog supplies and that fits with the
strong pricing in the negotiated hog market. Producer margins are
about $17/head in the red right now and may reach -$35 or -$40 later in
December. Stubbornly high corn prices are gobbling up any benefit that
producers might have seen from high hog values. However, producers
are accustomed to losses of that magnitude near the end of the year
when hog supplies are near their peak.

They know that they will likely make it back in the summer when hog
supplies tighten and hog prices soar. This week the nearby futures
made an abrupt turn lower on Thursday in response to the cutout
softening. On the week, Dec lost close to $3 but keep in mind that Dec
probably got a little overdone when it gained $7 the week before. As of
Friday’s close the Dec LH futures are sitting very close to what the
fundamental forecast says is fair value. They are in a comfortable spot
with little need to move much higher or much lower unless something
dramatic happens to the cutout next week. Of course, if packers
decided to slow the kill in order to improve margins, that could have a
material impact on both the cutout and hog prices, but my sense is that
they currently don’t have an appetite for that. If anything, they would like
to kill more, not less. Next week, watch the belly market to ascertain if
Friday’s bump has any staying power and keep an eye on the retail
primals since they seem to be the weakest link in the complex right now.

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