Pork Wraps

This was a constructive week for pork packers. They managed
to move the cutout higher while at the same time keeping some
pressure on the cash hog market. That helped to restore their
margins back to about $15/head, which is much more typical
for this time of year than the negative margins that they posted
near the end of August. The cutout gained $2.72/cwt. to
average $105.92 and the LHI dropped $2.16 to average
$97.75. However, the average masks the fact that toward the
end of the week the LHI was starting to move upward and it
looks like it will print over $99 sometime early next week. That
caused some nervousness for the shorts in the Oct contract
and as they covered, they pushed the Oct up close to $97 at
week’s end. It was rather impressive to see the cutout move
higher as the slaughter levels got back to normal after the
holiday. This week’s kill registered 2.47 million head, which
was a big increase over the 2.24 million head from the week
before.

Hams carried the load once again, but there were also some
modest increases in most of the other primals. The belly
primal gained about $3/cwt. this week, which is a rather small
price movement in the belly world, so I think market participants
are still expecting bigger things out of the bellies in the next few
weeks. Bulls have been hoping that the hams and bellies
would join forces and shoot higher simultaneously, but alas, it
seems the belly is just fine letting the hams lead the way.
Processing demand for hams should be quite strong this fall as
super-high pricing on fresh turkeys make hams a more
attractive alternative. However, the window to get hams cured,
smoked, spiral-sliced and packaged in time for Thanksgiving is
narrowing.

That could lend a sense of urgency that keeps the ham market
supported until the early part of October. After that, a price
reset becomes much more likely. I’m forecasting two more
weeks of strong ham pricing before they break lower. I do think
that bellies will join the party eventually, but it is hard to know
just how strong the potential price increase will be. Belly slicers
often wait for November, when the biggest kills of the year
occur, to put bellies into the freezer for use the following spring.
However, if they start to sense that bellies might not get any
cheaper than current levels, we could see a flurry of buying
activity in late September or early October. The retail primals
should do better over the next couple of weeks as grocers start
laying in supplies for their pork month features.

So, it seems to me that the cutout should stand a good chance of
posting further gains in the next couple of weeks. Right now, I’m
forecasting the top close to $110 on a weekly average basis, but if I’m
wrong it will probably be because the hams and bellies strengthened
more than expected and lifted the cutout above $110. I made the
same changes in the demand indexes for pork as described for beef,
incorporating the CPI as to better account for the impact of inflation.
After making that change for beef, it became apparent that the
pandemic-induced demand bubble has fully dissipated, but the
attached chart for pork indicates that there is probably still some of
that elevated demand left in the pork complex. The chart indicates
that I’m forecasting a rather big drop in pork demand for Q4 and I’m a
little nervous that maybe I’ve got demand dialed down too much over
the next few months.

That means that the risk to my cutout forecasts lies to the upside in
Q4. We are rapidly approaching the next release of USDA’s Hogs &
Pigs survey on September 29. I’m projecting further modest
contraction in the herd, with both the breeding herd and total swine
numbers down about 1% YOY. I see the Jun/Aug pig crop down only
half a percent however, as productivity improvements should be in the
cards. Even so, if this would mark the seventh quarter in a row where
the pig crop posted a YOY decline. Once China resolved their ASF
problem, it appears the need to continue growing the US herd
diminished. Speaking of exports, USDA finally got caught up on their
weekly export data after 4 weeks of darkness due to system issues.
When the data finally saw the light of day, the news wasn’t good for
pork.

Total exports for last two weeks have averaged about 10% below
where they were during the middle of summer, when pork prices were
much higher. The attached chart indicates that export volumes are
still lagging last year by a significant amount and the comparison will
get even tougher in Q4. As a result of smaller YOY exports and larger
imports, it looks like per capita domestic pork availability was modestly
higher YOY in Q3 of this year, even though pork production was
almost equal to last year. The same could hold true for Q4 if recent
trends continue. For now however, supply concerns take a backseat
because the combined margin has confirmed that a new demand
upcycle has begun and with a little help from the bellies, that should
support the cutout in the near-term.