CME: Pork Cutout Enjoyed a Rally Last Week

by 5m Editor
5 December 2012, at 2:13pm

US - The pork cutout enjoyed a rally last week, raising the possibility that the low for the fall season has been established, write Steve Meyer and Len Steiner.

USDA’s estimated cutout value for 200-lb., 53-54 per cent lean carcasses gained 2.9 per cent to average $84.00/cwt. That is still 6 per cent below last year’s $89.32/cwt. A rise in the cutout value is not all that unusual for late November and, as can be seen in the 2006-2010 average line in the following chart, the cutout value usually rises modestly into mid- December.

Pork Cutout

What is impressive about this rally is that it is occurring in the presence of, from all indications, ample ham supplies. Recall that October 31 inventories of frozen hams were, if anything, burdensome. The 187.9 million pounds of total ham in freezers on that date was 40 per cent more than one year ago. In addition, slaughter has run nearly 2 per cent larger than expected since mid-October, adding that amount to the expected NUMBER of hams produced. We must remember, though, that lower carcass weights should have a relatively consistent impact on the weights of all wholesale cuts and this year’s reduction in hog weights has offset 1.3 to 1.5 per cent of that unexpected 2 per cent increase in ham numbers. Still, any way one cuts it, the conclusion must be that there were plenty of hams to be purchased going into the holiday season and yet ham prices have rallied and supported a stronger cutout value.

Ham, Bone-in, 23-27#

About the only thing hotter, in terms of price, in the pork complex is 10-12 pound weaned pigs. Prices for these little guys hit rock bottom last summer as the selloff in hog futures and the run-up in grain and soybean meal prices created a situation where some of these pigs simply had no value. Spot market prices averaged $10 per head or lower from late July through early September and there were some quotes of $1/head during those weeks. And those prices were probably generous if one put a sharp pencil to the profit expectations. We worried that some healthy pigs would simply be destroyed but we never heard any reports of that actually happening.

The passage of time — meaning that pigs would be sold against stronger futures prices for contracts from Feb ‘13 forward — the selloff in corn and bean meal futures and the strengthening of lean hogs futures have driven pig prices steadily higher since September. The chart below shows the composite average (ie. includes both spot and formula-priced pigs) price as reported by USDA’s Agricultural Marketing Service each week. That price broke above $50/ head last week for the first time since January. Spot-priced pigs averaged $56.18 per head last week, their highest value since mid- February. Both prices are significantly higher than one year ago in spite of expected feed costs that are, by our estimation, about $5/cwt. carcass (roughly $10/head) higher. What gives?

Weaned Pigs, Composite Wtd Avg

First, the supply of these pigs is considerably tighter than last year. As can be seen below, the number of pigs traded in the spot market each week has been below year-ago levels in almost every week since mid-June and has been significantly below last year’s level in most of those weeks. Once lean hogs and feed ingredient futures pointed to possible profits, there simply have not been as many pigs available, pushing prices higher.

Weaned Pig Sales - Spot

In addition, there are almost certainly empty finishing spaces looking for pigs. Producers’ aggressive — and successful — efforts to reduce seasonal weight increases back in August and September moved pigs to market early, leaving empty barns. The pork industry generally pays for contract barns even if pigs are not in them, creating an incentive to fill them since the costs are sunk.