CME: Lean Hog Futures Continue to Slide

17 April 2012, at 12:32pm

US - Lean hog futures continued their slide on Monday following disappointing wholesale pork prices and the recognition that the market may be running out of time for mounting a major spring rally, write Steve Meyer and Len Steiner.

Nearby futures declined 150 points from the Friday close and they are currently priced at $88.5/cwt., about $10/cwt. lower than where they were in early March. The slide in futures has mirrored the softer tone in the domestic pork market.

The pork cutout was quoted last night at $77.85/cwt., $18.6/ cwt. or 19% lower than where it was at the same time last year. To say pork prices are soft would be an understatement.

The pork cutout is currently below 2010 prices but more worrying for futures is what happens in the next three to four weeks (see top chart). Normally hog futures rally into May as retailers and foodservice operators gear up for the start of the grilling season. And yet, here we are on April 17 and the pork cutout is lower today than it was two weeks ago.

When looking at the wholesale pork market, it helps to see where the boat is leaking and what improvements to expect going deeper into spring. The belly market continues to be an issue. It is something we have brought up before (DLR 3/2) but it bears repeating. Last night USDA quoted the belly cutout at $96.46/cwt., down some $51/cwt. or 35% from a year ago. It is important to note that belly prices last year were particularly high and one could argue that belly values are returning to a more normal trading pattern. Last year, belly prices were inflated by very strong demand from S. Korea (remember that the Koreans even waived the import entry fee due to domestic shortages).

Big foodservice promotions and active freezer inventory builds further added to the upward pressure. Today, it appears the situation has reversed. Exports appear to have eased to trend levels and foodservice promos do not seem to be a factor. As demand for bellies has pulled back (cf. spring 2011) the market is forced to absorb a larger supply. The latest inventory survey indicated a pig crop for Dec - Feb that was 1.2% larger than the previous year and the inventory of market hogs under 50 pounds on March 1 was 2.5% higher than a year ago.

Belly values have come under pressure and $8 of the $18 decline in the pork cutout value is due to the lower belly prices. This from an item that yields only 16% of the overall carcass. As for other items showing significant weakness: hams and trimmings. The ham market is weak despite strong export numbers to Mexico.

Deli business appear to be just fair and with the economy improving, maybe people are not brown-bagging as much as they used to. Trim values are very weak and this tends to affect most primals since it is a credit. LFTB may have been an issue but, in this writer’s mind, the primary contributor is the sharp increase in hog carcass weights, which are currently 2 pounds higher than a year ago and some 6 pounds higher than in 2010. Keep an eye on hog weights going into the summer, they were a primary market driver last year and will likely be again this year.