Pork Wrap October 8
Last week’s relatively small kill didn’t do much to support the pork
market this week as the cutout lost $2.44 on a weekly average
basis. The negotiated markets were also lower, down $3-4.
Interestingly, the LHI was almost unchanged on the week. Nearby
futures were down a little over $2. Last week, I talked about the
turn in the demand cycle that I’ve been seeing in the combined
margin chart. This week that upcycle took a little pause when the
combined margined ticked a little lower. We’ve seen those kinds
of breathers in the past, and this could be one of those. This
week’s decline in the cutout can be directly traced to unexpected
weakness in the ham market and, to a lesser degree, the loin
market.
Bellies were on the positive side of the ledger. There was a big
drop in the price of 23/27 bone-in hams on Thursday that really
took the primal lower. The value of the ham primal still bounces
around a lot based on the percentage of boneless hams in the mix,
but a $10 drop in a stalwart like the 23/27 is a sure sign that the
complex is softening. The belly primal averaged $203 this week
and while that is still a good ways below the $234 top that was
posted this summer, the bellies appear to be pretty vulnerable at
these levels. I’ve got it holding steady to a little higher for a couple
more weeks, but then breaking lower on bigger kills late in the
month. It may break sooner.
That, of course, raises the question as to whether or not the
demand upcycle can remain in place if the hams and bellies are
going the other way. Time will tell, but it is reasonable to expect
the price impact of this cycle to be considerably muted by
seasonally increasing pork supplies. This week’s kill came in at
2.597 million head—just a hair under 2.6 million. Packers will kill
224,000 head tomorrow. That will expand pork availability next
week, which won’t do the cutout any favors. The good news is
that kills probably don’t have much more room to increase since
the prior pig crop suggests a max kill just below 2.7 million head
this fall. This week’s kill was closer to what the pig crop implied,
but still fell a little short. So far, the industry is running a 400,000
head deficit relative to the pig crop since the first week of
September.
However, the recent Hogs & Pigs report weight range data
indicated that the pig crop was front-end loaded and that
supplies should tighten up in the second half of the quarter
(mid-Oct through Nov). That might help erase some of the
deficit and it might also make it harder to reach a peak kill of 2.7
million head. Barrow and gilt weights increased one pound this
week in normal seasonal fashion. I’m forecasting about 6
more pounds of carcass weight increase before weights plateau
in early December. The DTDS weights don’t suggest that hogs
are backing up at this point, but producers who negotiated their
hogs daily with packers continue to accept lower prices.
Negotiated hog prices have been in a downtrend since peaking
back in mid-June. Soon, those prices will be at risk of falling
below last year’s level. That is something that hasn’t happened
yet in 2021. USDA reported the official export numbers for
August this week and they were almost dead on with last
August. Strong movement to Mexico helped offset very weak
movement to China. So far, there hasn’t been any indication
that China is going to come back into the US market in a big
way. Pork prices in China are below what US product can be
landed for and producers in China are enduring negative
margins.
That may cause some smaller producers to exit the industry
and there is a good chance that the Chinese hog herd shrinks a
little bit in 2022. USDA is forecasting a 6.5% YOY decrease in
sow numbers. That would likely lift internal pork prices and
could rekindle interest in US pork next year. Oct LH futures will
expire on Thursday and the LHI currently sits just under $92,
while the futures have wanted to hang closer to $90. The
softness in the cutout late in the week is likely to drive the index
lower early next week. Next week, watch the ham and belly
primals. They hold the key to the cutout and the cutout holds
the key to the LH
