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CME: Seasonality Finally Catches Up with Pork Market

by 5m Editor
11 October 2010, at 10:01am

US - Lean hog futures continued to decline on Thursday on reports of lower cash pork prices, write Steve Meyer and Len Steiner.

The nearby October hog futures contract closed yesterday at $74.525, 75 points lower than the previous day and down almost 500 points since mid September. Back in September, we produced the chart below, showing that pork prices had managed (for the moment) to defy the gravity of the seasonal increase in pork supplies. Record high pork prices allowed packers to pay record prices for hogs, which in turn fueled the bull market in the lean hog contract.

Seasonality has finally caught up with the pork market. Last Thursday, the pork cutout was quoted at $88.95/cwt, a near record cutout price for early October. Last night, the cutout closed at $80.91/cwt, almost 9 per cent lower than just a few days ago. Looking at the chart to the right, the decline is so significant as to make one think that the pork market is coming apart at the seams. We do not agree. Rather it appears that the market was artificially high for too long and now better reflects that dynamic for this time of year. Moreover, if we look at the details, it appears that most of the decline is due to the sharp pullback in pork belly prices.

Many analysts, us included, were amazed by the sharp run-up in belly prices this summer and fall and thought that pork bellies were running on borrowed time. We thought that sooner or later seasonality but also end user reaction would cause pork bellies to pull back. Last night, the pork belly primal value was quoted at $92.16/cwt compared to $139/cwt just a week ago, a 34 per cent decline in just a week. And it appears that this decline in belly prices, which all kind of expected, has accounted for almost the entire decline in the value of the cutout.

Consider the following: The cutout on Thursday was down about $8/cwt compared to a week ago. The pork belly cutout was down $47/cwt. Considering a belly yield of about 16 per cent, the decline in the belly cutout accounted for 7.5/cwt of the cutout decline, or more than 90 per cent. The table below presents the closing cutout values for various primals and compares them to the average price in the last two months as well as the average price for October 2009. For all items, prices are well above year ago levels, even bellies which were hit hard the last few days.

We were a bit puzzled and will probably ask USDA for a bit more information given the quoted price for the ham primal. Based on the USDA sheet from last night, the pork belly primal was quoted at $78.66/cwt. However, heavy hams (23-27#) were quoted at $85/cwt while 20-23# hams were quoted at $92.5. Prices for pork trimmings, especially lean pork trimmings, also remain in flux. The price of fat trim has declined sharply while the leaner pork trim is now trading near record levels for this time of year. Lower lean trim prices (normal for this time of year) could further pressure hogs.