Steiner and Company produces the Profit Maximizer report on behalf of National Pork Board based on information we believe is accurate and reliable. However neither NPB nor Steiner and Company warrants or guarantees the accuracy of or accepts any liability for the data, opinions or recommendations expressed.
- Lean hog futures have declined by more than 10% in the last few days due to ongoing demand uncertainty this spring.
- Loin prices are expected to be steady in the near term, but eventually seasonal demand and lower supplies are expected to pull prices higher in May and June.
- The supply of pork bellies in cold storage at the end of February was 42% higher than a year ago and prices have been counter-seasonally lower. While normally belly prices move up in the spring and summer, processors are sitting on a lot of inventory and there is extreme uncertainty about price direction going forward.
- Ham prices have declined by more than 20%, not unusual considering that processors usually fill their Easter orders by mid-March. Current prices appear to be attracting a lot of export interest and expectations are for prices to trend higher in the spring.
- Pork trim prices have also pulled back. Lower slaughter and seasonal improvement in demand are expected to bolster prices in late April and May, however.
Weak Belly Prices And Sudden Drop In Ham Values Drag Pork Cutout And Hog Values Lower. But Is A 10% Drop In Summer Prices Justified?
It has been a rough few days in the hog and pork markets. There is plenty of speculation as to the reasons for the collapse and a lot of guessing about where prices go next. Turbulence in outside markets does not help, with some market participants likely taking risk off the table. But it should be noted that spec funds have been trading hog futures from the short side since late January (see chart above). The latest data from CFTC shows managed money funds increased their net short position by 19k contracts. So far, cash hog and product markets have given speculators few reasons to feel optimistic about the market and have voted with their dollars.
We can argue whether speculators are right or wrong in their assessment of the market for the summer months. But we can’t argue with what has been taking place so far. Wholesale pork prices have traded very differently than they did a year ago. Last night, the pork cutout was quoted at $81.6/cwt, down $20/cwt or 20% compared to a year ago. One argument thrown about has been that hog numbers coming to market have been larger than expected. That seems to be true enough. We calculate that Federally Inspected hog slaughter from December through March at 42.617 million head (see chart below). That is up 156k head or 0.4% compared to a year ago. This includes our estimate for the next 10 days but it should be close to the actual numbers.
In its December ’Hogs and Pigs’ report, the USDA pegged the inventory of market hogs 50 pounds and up at 45.813 million head, 914k head, or 2% lower than the previous year. There was one extra Saturday and one less weekday this year than last. However, that does not explain the big discrepancy. The supply of pork coming to market in the last four months has been lower than a year ago. Slaughter may be up 0.4% but average hog carcass weights have averaged about 0.5% lower. With pork supplies about the same as last year, a 20% decline in the cutout points is an accusatory finger at demand.
It is easy for market participants to talk about supply. We see slaughter numbers daily, make supply comparisons to the previous year, and then project prices on that basis. What’s always hard to figure out without the benefit of hindsight is demand. Futures markets are similar to football general managers in that regard. Tell me what you have done recently not what your stats were in the past. Last year, we saw futures get all excited about summer market potential when the cutout in January and February was far higher than expected. The reverse is true today.
One item more than any other has impacted the wholesale price so far – bellies (see first chart). The drop in the value of hams the last few days was seen as a catalyst for the selloff. We would argue that the fact that bellies lost ground was an important factor as well. For the cutout in April to be worth around $92/cwt and thus justify April hogs in the mid-80s, it would be necessary for the belly primal value to approach $125/cwt. Instead last night the belly primal value was $88/cwt.
For now the market seems to have repriced belly expectations for June and July. Bellies in mid-June 2022 were around $165 and around $195 in mid-July. How much belly prices recover in the next three months will be critical for hog values this summer. It has nothing to do with futures traders, and much to do with fast food chains and retailers.
Cold Storage Update
Bellies in Cold Storage
Much of the speculation in the pork complex has centered around pork belly inventories. The latest data was not as bad as feared although overall belly supply in cold storage remains burdensome. The total inventory of pork bellies at the end of February was near 71 million pounds. That is about the same as in January and 42% higher than a year ago. The fact that inventories did not increase may come as a relief. But if history is any guide, those inventories will likely linger until April, keeping prices in check in the meantime.
Hams, Loins, and Trim in Cold Storage
Ham inventory was 85.1 million pounds, 1% higher than a year ago but 21.4% lower than the five-year average. This is a low level for ham inventories for this time of year. This will result in relatively low inventories coming out of Easter. Pork loin inventories declined 6% from the previous month compared to a 6% increase in the last five years. Boneless loin inventories remain light, pointing to good clearance. Pork trim inventory at 51.1 million pounds was 3.8% lower than the previous month compared to an average of 8% build the last five years. Overall pork inventory at the end of February was 521.2 million pounds, 9% higher than last year but 8% lower than the five-year average, not a particularly burdensome level.
Steiner Consulting Group produces the National Pork Board newsletter based on information we believe is accurate and reliable. However neither NPB nor Steiner and Company warrants or guarantees the accuracy of or accepts any liability for the data, opinions or recommendations expressed.