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 September 03

The hog and pork complex continued on its downward trajectory this
week with both the cutout and negotiated hog prices dropping
approximately $5 on a weekly average basis. Meanwhile, the nearby
futures rose $2. Go figure. The problem in the cutout seems to be
almost entirely limited to the bellies, with the other primals holding about
steady on the week. Maybe that is why the futures market is reluctant
to follow the cutout lower. Traders know that bellies can turn on a dime
and normally downward belly price corrections happen over a period of
2-4 weeks and the move is often dramatic. The current down move in
bellies just completed its fourth week and is very close to the level where
the bottom was made back in the great June belly sell-off. After selling
off for a few short weeks, bellies often spend many more weeks grinding
higher before a new top is made. Maybe traders are banking on that
pattern repeating itself now.

My problem with that is that pork supplies are about to undergo a rapid
expansion moving from Labor Day to Halloween. That makes it much
tougher for any part of the carcass to post a stout rally. It is easy to rally
bellies in June when hog supplies are near their tightest, but it is a whole
different deal in the fall when supplies are growing week after week. My
guess is that bellies are approaching a near-term bottom, but the rally
phase won’t lift prices all that much. The bigger risk is that the other
primals start to come under pressure as supplies grow. The weather
forecast across the US for the upcoming Labor Day weekend looks quite
good although we need to keep in mind that some areas of the country
are struggling under the devastation wrought by Hurricane Ida, so those
areas probably won’t see much in the way of retail pork clearance this
weekend. Other parts of the nation probably will see good clearance.
Packers are expected to keep the kill light on Saturday in order to give
more employees a three-day weekend. That, in combination with
Monday’s no-slaughter, will tighten up pork availability early next week
and could result in a short-term bump in the cutout, but packers are very
likely to make up a good chunk of the lost production with a very large
Saturday kill the following week.

Anyone needing immediate ship product for next week is likely already
factoring that in. Packer margins fell $5 this week and now stand at just
a little over $11/head. I don’t think that packers are very happy with that
and thus will likely try to increase the pressure on cash hog prices next
week. Negotiated hog markets have lost over $10 in the last 10 days.
Some hogs will back up during the short kills ahead and that will make it
easier for packers to buy them lower next week. Barrow and gilt
carcass weights were reported down a pound to 206 pounds today.
That likely marks the 2021 bottom in weights are they should start to
trend strongly higher over the next few weeks as cooler weather and
freshly harvested corn ramps up their appetite.

The DTDS weights are still relatively low however, which suggests
that there is not any meaningful backup of hogs in the supply chain
at present. Hog producers are hoping that packers can find and
keep enough labor in their plants to get all of this fall’s hogs dead on
schedule. We will be watching the DTDS closely throughout the
balance of the year for signs that hogs are backing up. My sense is
that packers and/or second stage processors have already found
some additional labor or at least shifted some existing labor into
more value-added production over the past few weeks. The
difference between the core cutout and the printed cutout has
narrowed considerably since the middle of August and that tells me
that more value-added product is being produced and thus clearing
the market at lower prices.

Another piece of evidence in that direction is the price of pork 42s,
which have been falling like a rock lately. This afternoon they printed
$67 after being over $150 just two weeks ago. More value-added
processing means more trim production and that could at least
partially explain the rapid decline in trim prices. There is probably
also a demand-side effect as demand for products made with trims,
such as hot dogs, typically declines after Labor Day. I don’t want to
give the impression that pork demand is falling apart, because that is
not the case. Just the fact that we have a cutout over $100 at Labor
Day is an indication that demand remains way stronger than normal.
Beef prices are now declining and that retreat could accelerate
through September. That would weigh on pork prices also. The
weekly export numbers for pork continue to point toward a dismal fall
on the export side of the business.

China is no longer the roaring giant that it has been for the past
couple of years. A significant loss of export business this fall has the
potential to push prices lower even if domestic demand remains
strong. There are now several other countries that can land pork in
China well below the price that the US can achieve. I think that we
are going to be looking at a pork market this fall that slowly erodes,
but stays relatively high by historical standards. There will be some
brief updrafts in prices and post-Labor Day may be one of those, but
in general I’d expect the price depressing effect of growing pork
supplies and softer exports to outweigh any price enhancing effects
of strong domestic demand. Next week, watch those bellies because
as the bellies go, so go the cutout.


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