Low Belly Prices Continue to Impact Pork Cutout Values

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Low Belly Prices Continue to Impact Pork Cutout Values

The pork cutout at the end of last week was quoted at $99.5/cwt, 7.2% lower than a year ago. In the last two weeks, hog slaughter has been 2.316 million and 2.143 million head compared to 2.5 million back in March.  And yet the cutout is trading at about the same level as it did then. As we have noted in previous updates, the primary reason for the lower cutout is the sharp decline in pork belly prices. The pork cutout on Friday was down $7.8/cwt vs. a year ago and the decline in the value of the belly primal, which is 16% of the carcass, accounted for $7.2 of the decline.

There is not just one reason for the recent weakness in bellies.  First and foremost we think the decline is a reflection of the broader slowdown in QSR sales, something that is also evident in the trend for boneless skinless chicken breasts, a staple of QSR purchasing. Second, we think high prices last summer and the uptick in price in Feb/Mar impacted retail features for Q2.  Retail bacon sales have also been lackluster at best.  In the last four weeks, sales volume of bacon at multi unit grocery stores was down almost 4% vs. a year ago even as the average sales price was slightly lower than last year.  There is this idea that retailers sell more bacon for Memorial Day and then during the summer (BLT season) but retail sales figures tell us that it’s year end holidays when more bacon is sold. The expectation/hope is that lower slaughter combined with a few well timed features will help bellies mount a rally, albeit brief, in July and early August.

Pork In Cold Storage Remains Well Below Previous Year, Continues to Present Upside Price Risk for the Summer

• The supply of pork in cold storage at the end of April was 435.8M pounds, 4.5% less than a year ago and 12% lower than the five year average.  Inventory jumped 8.7% from the previous month, higher than the long run average but consistent with the uptick in inventories we have seen for April in the last four years.

• The inventory of ham in cold storage was 99.3M pounds, 12% higher than a year ago.  Inventories increased 17% from the previous month, a slower build than we normally see during this time of year.  Processors have already accumulated more hams in cold storage and likely opted to limit inventory inflows.

• The inventory of bellies at 52.4M pounds was 8% lower than last year and 15% lower than the five year average.  While this may be viewed as supportive, more important is the 15% jump in inventory from the previous month.  This is double the rate of inventory accumulation, a somewhat bearish signal.

• Inventory of trim in cold storage was 42.5M pounds, 6.8% lower than a year ago.  Inventories increased 4.6% from the previous month, above the long run average gain.

Key Takeaway: Pork supply seasonally declines during Jun/Jul/Aug and we expect that slaughter to drop once again under 2.4M/week during this time of year.  While in the near term weak demand for some processing items has resulted in more spot supply, the lower pork inventory combined with still robust export sales presents more upside price risk, albeit not to the degree that we expected three months ago.

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