While the pork cutout is about 10 per cent lower than its annual highs in late June, futures have been buoyed by the surprising strength in a number of pork cuts and trimmings as well as a bullish cold storage report. Particularly positive for nearby hog futures has been the fact that the cutout has gained ground despite a decline in the price of pork bellies. As we have noted previously in this report, the surge in the belly value was a big reason for the sharp appreciation in the pork cutout value and hog prices this past spring and early summer.

At some point, the rise in belly prices accounted for as much as 90 per cent of the overall increase in the pork cutout. More recently, however, the cutout gains have been somewhat more balanced. On July 23, the pork cutout was quoted at $99.65/cwt., $6.97/cwt (+8 per cent) compared to a year ago. Pork belly prices gains remain important, contributing about $3.64/cwt to the year over year increase in the pork cutout. However, higher ham prices are now contributing $1.83/cwt to the cutout gains. High rib and picnic values remain positive as well.

The only item that continues to be a drag for the cutout are pork loins, with the loin primal down 2 per cent from a year ago. Market participants continue to ponder whether the recent modest improvements in the cutout signal some additional strength going into August and September, similar to what happened in 2011. Or will the gains be short lived, driven in part by some residual summer demand for pork trimmings, demand that tends to wane in late summer? Your answer to these questions will likely color your view of the market direction in the coming weeks.

One thing that will be different this year compared to last is the supply of pork that will come to market in August and September. Last year, a sharp spike in feed costs forced producers to accelerate hog marketings in the fall, pushing hog and pork prices sharply lower for a time. This year, it appears that marketings will likely follow a more normal pattern. A big unknown remains the impact that the PED virus has had on hog supplies on the ground. It could further limit hog and pork supplies in the short term.

It appears likely that tog supplies will likely be tighter in August and September than a year ago. However, heavier hog weights will offset some of the declines in slaughter. Hog carcass weights are now running just under 203 pounds per carcass, 1.5 per cent higher than a year ago. The expectation is for hog weights to probably bottom out around 202 pounds per carcass in early August (they were under 201 last year) and then climb quickly in September and October. Ham values have been strong so far but they could face some pressure should pork trim prices pull back. Ham supplies in cold storage were larger than a year ago, one of the few items that showed an increase compared to a year ago.

Pork belly demand is one very big wild card, in our view. Belly stocks remain particularly tight. This is not unusual, as few will put bellies away at this time and the normal tendency is to keep inventories lean with current record high prices. If we were to pick two items to watch in the next 60 days, it would be pork bellies and trimmings. They are two items that normally peak in July and early August and the decline sharply in the fall. Any deviation from that scenario could change the path that futures have laid out.