The charts below show the stark differences in Live Cattle and Lean Hogs futures since March. The top chart is June Live Cattle (which are still on the board) and the bottom is June Live Hogs (which expired on Friday). Both began falling just after the beginning of the year and the Live Hogs complex declined rapidly as the impact of Russia’s ban on US pork and the ractopamine-free certification requirements in China took effect. The Russian ban, of course, hit beef as well. Lean Hogs bottomed out in early April and have made a dramatic climb since early May with the June contract going off the board at a life-of-contract high $102.30 on Friday. USDA’s estimated pork cutout value has gained over $20/cwt in just ten weeks and last week’s average of $100.76/cwt. is the 6th highest weekly average ever, trailing only five weeks at the end of July and beginning of August in 2011.

LEM - June Live Cattle

HEM - June Lean Hogs

Meanwhile, the cattle market continues to struggle in spite of recent record-high Choice cutout values and Select cutout values that last week were very near the record $195.27 hit back in March. The late spring surge for the Choice cutout was driven by retail promotions of higher-quality cuts around Memorial Day. There was concern that when the holiday was over, we could see some weakness. Those fears appear to have been very well founded. Middle meats (loins and ribs) had been carrying the cutout value all spring with end meats (chucks and, especially, rounds) struggling. Lower values for those higher-value middle meat cuts have taken the weekly average for the Choice cutout nearly $9/cwt lower in just three weeks.

Will the trends continue? We think it is likely that pork values and hog prices will remain strong for several more weeks. The cutout has peaked in early August, on average, over the past 5 years and last week’s gain in the cutout value was the largest of any week so far in 2013. The key question is very likely “Can bellies continue to drive this cutout value?” since that one cut has accounted for 80 to 90 per cent of the year-on-year increase. It seems that bacon is everywhere these days (we had some on cupcakes last week and in loose-meat sandwiches at the recent World Pork Expo) and we are just now entering the prime BLT (bacon-lettuce-tomato) sandwich season as fresh tomatoes will become available soon. After fully expecting $100 summer hogs following the December pig report, this year’s soft exports had caused us to question whether cash prices would actually reach that rare benchmark. The market has certainly proven us wrong and slaughter levels virtually even with one year ago suggest that we may stay here awhile.

As for cattle, we think there is still room for some strength. Daily fed cattle slaughter is still expected to fall short of last year’s level by 3-4 per cent this summer. Weights are still large but they are not adding to production on a yr/yr basis because they are now being compared to the high beta-agonist-driven weights of last year. And packer margins were the highest since last summer two weeks ago and remain about $150/head higher than as recent as April. Our experience is that packers can’t stand prosperity much more than can feeders so, if cutout values —and thus packer revenues — can hold some strength, packers may chase some cattle in the next few weeks.

Our concern is still the dry conditions in the western plains and southwest. Beef cow slaughter, though lower than in 2010 and 2011 at this time of year, remains significantly larger than last year (+17 per cent since the end of March) as expansion plans meet the reality of dry pastures.