The December lean hog futures contract jumped a little over 400 points on Monday, a result of fundamentals running counter to expectations, Steiner Consulting said in the Daily Livestock Report.
“So far this fall the pork cutout has been tracing almost the exact same path as a year ago and if that trend continues to hold, then we are potentially talking about a $90 cutout in early December. That is the expectations piece. With a cutout at or sub $90/cwt, it’s a tall order to keep the index in the mid 80s, especially with hog slaughter seasonally trending higher at this time of year. Shortening December hogs with this setup would make some sense,” Steiner Consulting wrote.
However, the fundamental picture holds a few surprises, including a lot of uncertainty if that will change in time to affect the December contract.
Last night the pork cutout closed at $96.95/cwt, $2 higher than a year ago, Steiner Consulting reported. Fresh pork prices remain below year-ago levels despite lower production, a sign that demand has softened.
“Our opinion is that this is in part due to increased competition in the meat case. The loin primal was down 5% vs. year ago, ribs were down 8% while butts were almost unchanged. The big variance versus last year is in processing items. Ham primal value was last quoted at $104.48/cwt, 56% higher than a year ago. The increase in the value of the ham primal is responsible for a $9.3/cwt gain in the cutout (in other words the cutout would be $9.3/cwt lower y/y if not for higher ham prices),” Steiner Consulting wrote.
Due to uncertainty around how many turkeys will be available due to the avian influenza outbreak, retail interest for hams this holiday season has been strong. With whole turkey wholesale price currently at +$180/cwt, hams are a good deal. Add to this continued strong interest from Mexico and ham market continues to trade bid, the report said.
“For those that were bearish December, the risk for hams and thus for the cutout was to the downside. After all, Thanksgiving business is close to getting wrapped up and that removes a chunk of holiday demand. Add to this the weakness in bellies and one can see why the expectation was for the cutout to lose ground through this month,” Steiner Consulting pointed out.
It’s not a sure thing that ham prices will lose ground before the December contract expires, the report emphasized.
“The higher prices for 72CL pork trim suggest to us that there are fewer hams, and probably picnics as well, that are getting boned. Product continues to flow to Mexico and other markets, helping underpin the cutout. Last night 72CL pork trim traded at $107.04/cwt, $20/cwt higher than a year ago. Part of the reason for the 72CL market trading so firm has to do with the decline in overall slaughter and buyers caught short during a time of year when supply is generally plentiful,” Steiner Consulting said.
The last time 72s traded firm in November was in 2019 when China was buying more U.S. pork. Now it is Mexico.
“The other piece of fundamental news not going according to plan are hog weights,” Steiner Consulting said.
Weights typically trend up during October and November as fresh corn and cooler weather improve conversion rates. However, the last two weeks the average weight of producer-owned hogs has barely budged, Steiner Consulting said.
“This tells us producers are current and a smaller than normal meat margin, last night at just $6/cwt, may persist,” Steiner Consulting said.
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