So far, however, the response in the pork cash market has been anything but negative and the pork cut-out has been steadily climbing since the start of the year. On Monday evening, USDA quoted the overall pork cut-out at $88.87 per cwt, a whopping $20.05 or 29.1 per cent higher than the same time a year ago and just a few dollars shy of the all time record levels established last year. The nearby February lean hog contract gained 45 points and closed at $84.95, about $2 over the IA/MN cash price.

The two charts below show both the performance of the cut-out compared to the previous two years as well as the trend in cutout and hog prices since January of last year. One thing that is quite obvious in the second chart is that the spread between the cutout and hog carcass remains notably bigger than a year ago, an indication that packer profits are in good shape. Normally, this is the time of year when packer margins get a bit tighter but so far it appears that pork demand remains in great shape and this is fueling hog futures as well. The June 2011 contract closed on Monday at $101.35, a new contract high and the highest futures hog price we have seen.

The strength in cash pork prices has been broad-based, with all the cutout components contributing to the year over year increase. Some items, however, are doing much better than others and they offer clues as to what is driving cash prices at this time. The most notable gain is in the price of bellies. While USDA did not provide a quote for any specific belly items (the mandatory reporting cannot come soon enough), it did quote the belly primal at $118.13 per cwt, $4.95 or 35 per cent higher than a year ago. Even though bellies account for 16 per cent of the weighting in the cut-out index, they contributed 25 per cent of the increase in cutout value.

A number of factors have contributed to the strength in bellies. Export demand is strong, with Korea reportedly very active now that 50,000 metric tons (MT) of bellies can enter tariff-free. Also, US end users remain very concerned about belly prices in the summer months following the debacle of a year ago. The authors suspect a lot of them are running hard to build inventories. We also have noted reports of large users jumping on the breakfast bandwagon (Hardees, Wendys), which often includes the ubiquitous bacon and eggs. The pork butt primal was quoted on Monday at $103.84 per cwt, $3.84 or 56 per cent higher than a year ago. Ham prices are up 16 per cent from a year ago but prices have not increased as much as the overall gains in cut-out values. We should start seeing ham demand pick up going into Easter although this year Easter is one of the latest on record, and this will delay and diffuse the seasonal pick up.

Overall, the story in the pork complex is that cash markets remain strong, and this has helped propel futures higher despite weather disruptions and heavy carcasses.

Further Reading

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