CME: Hog Market Deflates... Again

US - Summer hog futures rose sharply between mid May and mid June, driven in part by the rally in the grain markets but also rampant speculation that robust Chinese export demand would force domestic prices higher, write Steve Meyer and Len Steiner.
calendar icon 5 July 2016
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The rally was also supported by strong pork export sales during and after Memorial Day, which some used to justify some fairly lofty projections for the summer. Since then, however, disappointing supply and price reports have caused participants to cut back on their bullish summer bets. Fall prices also are down from the lofty levels achieved a couple of weeks ago as participants contemplate the impact of +2.4 million hogs/week in November and December.

So what happened? First, market participants failed to recognize the effect of big weekly slaughter on the loin complex. Given that the US retail market is fairly well saturated, even small increases in supply tend to have a significant price impact. The loin cutout this year peaked in late May, just ahead of Memorial Day, at near $97/cwt. Last night (June 30) the loin cutout value was quoted at 84.79, down 12/cwt and erasing about $3/cwt from the value of the carcass.

Seasonally pork loin prices don’t fare much better in July and August. While we could see a bit of an improvement because of lower slaughter, retailers know quite well that selling pork loins in +90 degree heat is an uphill climb.

Ham prices have held up quite well so far, with the ham primal gaining some $15/cwt between late May and today. The gains in the value of hams have offset the decline in loins but the net effect has been only a very modest increase in the carcass value during the past six weeks.

Some other items that provided value to the carcass in May and June, such as butts and ribs, also seasonally decline in July and August. The rib primal tonight closed at $127..48,down about $35/cwt compared to where it was trading in late May. Even though ribs are a relatively small part of the carcass, such a big decline erased about $1.6 from the value of the carcass since late May.

Pork belly prices have been moving higher, as they normally do at this time of year. But their increase has been very much in line with the seasonal trend, no big bullish surprises and not enough to carry the carcass to the lofty levels futures were pricing a couple of weeks ago.

Weather will remain a factor for the hog market in the short term, largely impacting hog weights. Exports have been and will continue to be a key factor as well. The latest weekly export numbers to China were somewhat disappointing at a little over 3,000 MT, which also may have played a role in participants view of price potential in late summer and fall.

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