CME: Has the Pork Cutout Finally Bottomed Out?

28 March 2012, at 12:49pm

US - Has the pork cutout finally bottomed out? Normally pork prices are soft during Lent as retail demand tends to be weak and most ham purchases for Easter generally are completed by early March, write Steve Meyer and Len Steiner.

Baseball season has not started yet, which tends to support for hot dog raw materials and grilling season is still a few weeks away. The numbers look off compared to a year ago but seem more in line, at least from a seasonality perspective with 2010. Last year bucked the trend, in large part due to big export shipments to S. Korea which was struggling with the fallout of foot and mouth disease.

US pork exports in March 2011 were a record 491 million pounds, 120 million pounds or 32.5% higher than the previous year. Higher shipments to the S. Korean market accounted for about half of that increase as US packers shipped about 87 million pounds of pork to that market compared to 25 million pounds the prior year. This year, US shipments to S. Korea remain strong by historical standards but will fall short of last year as the situation in that country has settled down. US pork exports to S. Korea in January were around 46 million pounds and we expect February and March shipments to be around 48 - 50 million pounds. China/Hong Kong in our mind remain a critical part of the export puzzle.

But exports are only a part of the story. We don't have a complete picture of disappearance for March but it appears to us that domestic pork demand also has been softer than expected. This despite good weather across much of the country. Pork supplies have posted a modest increase from year ago levels but they are notably higher than in 2010.

As the chart below shows, hog slaughter has tracked close to 2010 and 2011 levels. Weekly slaughter (measured as a 7day moving total) currently is at around 2.125 million head, 0.5% higher than a year ago. Hog weights are only modestly higher than a year ago. The MPR data shows that the seven day running average of hog weights is currently pegged at 209.1 pounds per carcass, about 0.8 pounds or 0.4% higher than a year ago.

Implied weekly pork production is currently running at 444.4 million pounds a week, about 3.7 million pounds or 0.8% higher than a year ago. This is not a terribly high increase in production. One area that remains problematic for the market are trim values, which contribute to primal cutout values and eventually to the value of the entire carcass. The price of 72CL pork was quoted on Monday at $59/cwt., about 32% lower than what it was a year ago. Fat pork trim is faring even worse, with 42CL values currently down 36% from last year. Bellies and hams are also in bad shape. Pork belly prices were not quoted on Tuesday but based on the belly primal value, it appears that the benchmark 14-16# belly price is currently around $104/cwt, some 30% lower than last year. The benchmark 23-27# Ham price was quoted last night at $62.86/ cwt, down 26% from last year.