CME: Negative Sentiment Lurks in Livestock Complex
US - Lean hog carcass and pork cutout values continued to drift lower on Wednesday as pork supplies appear to be more than adequate at this time, write Steve Meyer and Len Steiner.Demand seems to be ok for the moment but it will face some challenges as end users are on the defensive and will likely go hand to mouth given the rise in volatility. The pork cutout closed at $82.94 /cwt, $0.9/cwt lower than the previous day and $2.9 /cwt lower than the week before. Pork cutout values are currently at the lowest point since 14 April but remain well above the depressed levels of a year ago. Lean hog prices have also drifted lower, reflecting in part the decline in cutout values but also the negative impact of lower equity markets and a stronger US currency.

While there is plenty of negative sentiment to go around
in the livestock complex at this time, it is important to put current
hog prices in context. Despite the lower prices we have seen in
recent days, much of the decline is in line with the seasonal tendency
for prices to drift lower from mid-May levels. The top chart above shows the daily trend in the price of the cash lean hog
carcass (IA/MN wt. avg.). For all of this year, prices have been the
highest we have seen for the past 10 years. Even with the current
decline, prices remain on the high side of the range. At around
this time in 2008, a year that saw a significant spike in hog prices
during the summer months, prices in early June were hovering
around $71-72 /cwt, compared to the $74.5 /cwt where they closed
last night.
Hog futures, represented by the red dots in the chart
above, remain optimistic that prices will hold above the 10
year range for the remainder of the year. For that to happen,
however, we will need to see continued good demand not just for
pork trimmings and bellies but also for hams and especially loins.
Pork loin prices were instrumental in supporting the cutout in late
April and May, in large part a result of increased retail activity for
the Memorial Day business. The price of 1/4“ trim loins in mid
May was around $1.53 per pound while it currently stands at 1.14 per pound, a 26 per cent decline. Some of the decline was expected as
seasonally loin values are lower in the second part of May and into June.
However, the price decline has been about twice as large
as it normally is for this time frame. One factor that will be challenging not just for loin prices but the entire pork market is the
price of chicken items in the next two to three months. With grain prices on the defensive, broiler producers appear to once again
be on a growth path. And they have the ability to increase production relatively quickly. Weekly chick placements were on average
2.5 per cent over year ago in April and May, an increase that will be further amplified by heavier birds coming to market.