Futures Drift as Spot Market Shows No Signs of Recovery…Yet

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Summer Futures Under Pressure Following Ongoing Uncertainty About Retail, And Especially Processing Demand

Lean hog futures continue to slide as spot prices give participants little reason to feel better about spring and summer business. Market participants that accumulated product in inventory earlier in the year are seeing the value of that inventory erode daily. In this environment, if spot supply is not moving and packers need to catch a bid, prices need to be even lower to entice buying. Arguing whether something is undervalued makes little sense at this point, especially if the buyer is under water. Take bellies for instance. Putting bellies away in Jan/Feb at $90 seemed like a great idea as they offered an implied $130 price by the time you took them out in late spring. That calculation has been turned upside down now that bellies are still under $85 and buyers face $30-40 losses if they are to draw down their inventory. It would take a special salesman to get a buyer that’s this much under water to take even more.

Summer futures have lost ground in the last three weeks as the trajectory implied by the Feb/early Mar product market has shifted (see chart above). Bellies have been weak for much of the year. They also still account for a big portion of the value loss vs. year ago. But in the last three weeks it has been hams that have led the way down for the cutout. Since March 13, the pork cutout has declined $11/cwt or 12%. Almost half of that decline is due to lower ham prices. The ham primal value went down from near $92/cwt to $73/cwt on Friday. Bone-in hams sold at $62/cwt, a number that was hard to imagine even two weeks ago. The pullback in ham prices has a seasonal component to it. Usually ham values peak a few weeks before Easter. That is because processors need to get product delivered to retailer distribution centers by a certain time before they go into the retail case. One would think that lower prices would encourage some export demand and they probably did. However, export buyers are also in tune with the seasonal tendency for this item and likely sat on the sidelines and put bids well under the market. Seems they did catch those bids in the last few days as packers struggled to clean up the spot market.

Then there is all the talk about demand. In the last two years we noted that at the wholesale level buyers were paying more than in past years for the same level of supply. That’s not the same as consumer demand, however. Eventually the consumer will have to pay more but there is a price transmission lag. Prices at retail are up and it appears the consumer is buying less volume. That’s how the demand curve usually works. USDA noted that for the week ending March 31 ham features at retail were down 10% than the comparable week last year (comparison of the weeks before Easter) while the price of the various ham items is up by double digits. Current lower wholesale prices should eventually show up in the meat case. But just as it took time for the high prices pass to through, it will take time for the reverse to happen. And often prices take longer to adjust on the way down. For now, market participants are left guessing as to the price needed to clear the market, especially after the experience of the past couple of years.

Pork Exports Update

Exports of fresh/frozen and cooked pork in February were 171,755 MT, 4.5% higher than a year ago but below 2021 levels and the five-year average. The slowdown in exports to Japan and South Korea continues to have a negative impact on the pace of export shipments. Shipments to Japan, the second most valuable pork market for U.S. product, were 28,143 MT, 10.8% lower than last year. The value of exports to Japan at $112 million was 18% lower than last year. Mexico remains the top market for U.S. pork, taking 65,289 MT in February, about the same amount as last year (+0.4%).

On a more positive note, exports of pork variety meat in February were up 40% compared to a year ago. China is by far the top market for pork variety meats, taking 25,844 MT or 52% more than last year. Variety pork meat exports to Mexico were 11,542 MT, up 32%. Shipments of fresh/frozen pork muscle cuts in March (about 75% of total pork shipments) were 4% higher than the previous year. The outlook is for U.S. pork exports to be robust in April and May. In the last four weeks, net pork sales have averaged about 20% above the same period last year while outstanding pork export sales are currently 11.4% higher than at this point last year.

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