All of a sudden, market participants do not appear as confident about the outlook of commodities and are cutting back long positions. Back in April and May there was plenty of speculation about the resurgence of inflation and the impact that it would have on commodity values. Often seen as a hedge to future inflation, commodities appeared as an attractive option. That may still end up being the case and there are plenty of market participants that remain bullish on inflation but for now bears appear to have the upper hand.

Pork futures remain especially weak and all lean hog contracts lost ground on Wednesday. The nearby July contract declined some 178 points, a sharp reversal following several days of gains. Deferred futures also have lost significant ground. In part this has been driven by the sharp retraction in grain futures. With corn futures now approaching $3 per bushel and soybean meal down as much as $80/ton (Dec contract) the market clearly believes producers do not face as urgent an imperative to cut back as they did in early June. The pork cutout showed a moderate improvement on Wednesday, closing at $55.6 /cwt, $1.3 higher than the day before and slightly higher than a week ago.

Cutout values continue to be well below year ago and five year average levels, in part because of the amount of pork currently available in the market place and also softer export demand. As the attached chart shows, pork production has been running 10 per cent or more above the 2003-07 average. Last year, this kind of an increase was absorbed by booming export markets. But with the economy in a recession and consumers looking to cut back consumption, both at retail and foodservice, pork values have had to adjust sharply lower to clear the market.