CME: Pork Primals Above Year Ago Levels

US - Nearby August lean hog futures settled at all time contract highs on Monday, buoyed by renewed strength in wholesale prices and generally tighter supplies than a year ago, write Steve Meyer and Len Steiner.
calendar icon 7 August 2013
clock icon 4 minute read

Pork cutout values usually hit their annual highs in early July but this year, similar to what we saw in 2011, wholesale pork prices continue to trade quite firm well into August. As has been the case for much of this year, higher pork belly prices underpin much of the strength in the cutout.

However, all other pork primals are now above year ago levels. On Monday, the pork cutout closed at $104.56/cwt, $11.76 (+13 per cent) higher than a year ago. About half of the year over year increase was due to higher pork belly prices. But other primals, from loins to hams to picnics, are now tracking above year ago levels.

As we have highlighted in the past, pork trim values are very firm and this has contributed to the increase in the value of many primals. As to what is driving the current surge in pork prices, one can look at both seasonal demand, a reduction in available supplies and possibly better exports.

On this latter factor, we have yet to see any convincing numbers showing a major rebound in pork exports but, judging from the current action in the market, it is likely that pork export business may have improved. USDA will release its monthly update on US meat exports later today and we will provide our normal update tomorrow.

Domestic pork demand is also reportedly better than it was last spring and during the same time a year ago. Temperatures this year are notably cooler than a year ago in many parts of the country and this has likely stimulated consumption of backyard grill staples such as hot dogs, sausages and hamburgers. As we noted yesterday, improvements in foodservice demand and a decline, albeit excruciatingly slow, in the number of the unemployed/underemployed, also has benefited pork demand this summer.

As pork demand has improved this summer, there are lingering questions about the supply of hogs coming to market in the near term. Weekly hog slaughter last week was pegged at 2.022 million head, 0.9 per cent lower than a year ago. Weekly slaughter has declined for two consecutive weeks. Still, hog slaughter since 1 June (the time of the last hog survey) actually is slightly ahead of the survey data. Weekly hog slaughter since 1 June shows a total of 17.796 million hogs have come to market, about 0.9 per cent MORE than during the same period a year ago.

This is consistent with the results of the Hogs and Pigs survey, which showed inventories of pigs under 120 pounds as of 1 June were estimated to be up 1 per cent from year ago levels. Slaughter numbers will likely run well below year ago levels for the remainder of August and in September, however. This is largely because producers last year accelerated their marketings in order to limit hog carcass weight gains. This year, we will likely see fewer hogs come to market but at heavier weights.

End users (retailers/foodservice operators/consumers) likely are looking at corn prices heading lower and may start counting on an immediate decline in pork prices. While lower corn eventually may mean lower meat prices, the key word is eventually. For now, lower corn prices mean improved margins for producers, who struggled with red ink for much of the last 12 months. At some point, the profits become good enough to cause producers to expand supplies and lead to lower prices. But beware of those lags, animals don't grow at the push of a button.

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