The CME nearby lean hog contract closed on Tuesday afternoon at $55.425, 198 points higher than the previous trading session and currently at the highest point since 24 July. Most other lean hog contracts gained as well but much of the increase came in the front months as the recent improvement in hog cutout values provided some optimism that pork demand in Q4 may outperform earlier estimates. One item to look at when assessing pork demand into the holiday season is the price of hams, an item that traditionally helps carry pork cutout values at this time of year.

Ample pork supplies and weak export demand pressured ham values during much of last spring and summer (see chart above) and prices were below year ago and five year average levels for much of 2009. On Tuesday, however, USDA quoted 23-27# hams at $58/cwt, $6 higher than a year ago and only slightly below the five year average. Overall wholesale pork cutout have been steadily improving and they rose to $56.20/cwt on Tuesday, almost $1 higher than on Monday. Cutout values remain below year ago and five year average levels but they have been closing the gap in recent weeks.

There is always the possibility that the recent strength in the wholesale pork market may be short lived and prices could slump again once holiday demand begins to fizzle. The improvement in hams is welcome news but hog values will need to receive support from other carcass parts as well. Trim prices remain weak and pork loins continue to struggle amidst plentiful protein options in the retail case. On the other hand, one needs to consider some of the more longer term factors. Hog numbers have started to moderate and slaughter in the last four weeks has been about 100,000 head or 1 per cent lower than a year ago. Supplies are not exactly tight but as the chart to the right shows, pork production is currently running around 6 per cent over the 2003-07 average.

During the May - August period, weekly US hog production was on average up 12 per cent vs. the five year average. (Please note that in the second chart we purposefully took out 2008 as an outlier year and chose to compare to the five year average for 2003-07). The weak US dollar also provides reason for optimism that pork exports will remain strong going into 2010. The outlook for feed prices is a wild card. Corn futures are up compared to late August but they have declined in the last two trading sessions. More recent lower corn prices are not exactly supportive of higher hog prices but generally the outlook for feed is much more bullish than two months ago, and that could maintain the impetus for herd liquidation into 2010.