Lean hog futures have pulled back in the last 10 days as cash prices have not kept up with the momentum in the futures complex while hog weights remain heavy. Outside markets have negatively impacted sentiment but it appears that for now market participants are struggling to balance the overall bullish momentum in the livestock markets (as well as in other ag. commodities) with the reality of cash prices on the ground. For instance, the nearby April contract on 22 February traded as high as $93.8/cwt., compared to cash pork cutout values of around $90/cwt. at the time. Seasonally lean hog futures move higher into April but the question was whether it is reasonable to expect the pork cutout to hit $100/cwt as early as April. Given the recent action, the answer appears to be ‘probably not’.

The spread between the pork cutout and lean hogs (IA/MN) since the beginning of the year has averaged + $9.22/cwt, compared to an average spread of + $5.65/cwt a year ago. Last year, for the period 1 March 20 - April, the average spread between the cutout and IA/MN hogs was + $4.33 and the average spread for the same period in the past five years was + $4.26. As of the writing of this report, the spread between hogs and cutout remains over $10/cwt, implying strong margins for packers. There are a number of reasons for the large spread but too many hogs likely is not one of them. Hog slaughter for the seven days ending 2 March was reported to be 2.133 million head, 1.8 per cent lower than a year ago. Indeed, weekly hog slaughter for week ending 2/19 and 2/16 was down 2.97 per cent and 2.34 per cent, respectively. Hog weights, on the other hand, remain an issue. Indeed, despite two weeks of notable reductions in hog slaughter, total pork production actually has been very close to year ago levels, as heavy weights have offset slaughter declines.

Dressed hog carcass weights are currently running well above year ago, in part reflecting much better feed quality but also the fact that producers continue to put more pounds on hogs in order to maximize returns. According to the mandatory daily slaughter report (data is for 1 March), the weighted average dressed weight of hogs slaughtered was 207.48 pounds, compared to 202.78 pounds for the comparable day a year ago. This represents a 4.7 pound or 2.3 per cent year over year increase. It appears producers are waiting as long as they can to market these hogs and in the process losing some bargaining power. For the moment, reports are that pork demand remains quite strong and prices are on track to stay well above year go levels in Q2. One of the items that has contributed to the strong gains in the cutout so far has been the sharp rise in belly prices. But if we are to see the pork cutout climb higher in April, higher prices will be needed for items such as ham, which seasonally benefit from Easter demand. And that belly demand stays strong, both in the domestic and export market.