Lean hog futures for the fall, winter and spring are currently trading below breakeven levels, even when accounting for the lower grain prices. The question for market participants is whether pork prices will hold up, Altin Kalo, chief economist for Steiner Consulting Group, says in the Daily Livestock Report.
The pork cutout for October is trading around $92/hundredweight (cwt) vs. $105 last night and December cutout is trading around $84/cwt.
“Implicit in those futures prices is the expectation for belly prices to drop in the 110‐120 area and fresh pork prices to steadily lose ground as spot supply availability increases. Just as important for hog values in the fall is the relative demand for processing services as the supply of hogs on the ground seasonally increases,” Kalo says.
It’s no secret that pork supply goes up in the fall, it happens every year and it will happen this year as well, he points out. Packers accommodate this increase in demand for processing by running shifts on Saturday. But he says the strength of hog processing demand relative to the demand for pork will determine the meat/hog spread.
For example, the last two years have produced very different outcomes. In 2021, the average spread of the cutout vs. the lean hog index between mid-September and mid-December was $15.6/cwt, the spread being as high as $20/cwt in mid-October and early December. In 2022, however, during this same time period the spread averaged $6.1/cwt and it never climbed over $11/cwt (see chart).
Producers remain very current in the near term, even as the supply of hogs coming to market continues to run ahead of what the June inventory indicated. Based on that June count, Steiner Consulting Group expects slaughter to be about the same as it was last year. However, in the past four weeks slaughter averaged 1.6% above a year ago and slaughter has the potential to be around 2.48 million head, this week 2.8% higher than a year ago.
“Judging from the trend in hog carcass weights, producers have been aggressively marketing hogs given negative margins in the spring and early summer. With futures showing a steep discount to cash, it makes sense that producers will look to keep hogs moving,” Kalo says.
The average weight of producer-owned hogs in the past five days has averaged 206.6 pounds, 0.5% lower than a year ago.
“Will hog supplies continue to surprise to the high side, requiring more Saturday processing time? Or will producers manage to stay ahead of the fall supply increase?” Kalo asks.
Part of the issue in 2021 was that weights increased at a fast pace starting in October, implying more pressure on producers to get hogs sold and eventually a wider spread between the cutout and cash hog values. In 2022, however, producers were very current during the fourth quarter, allowing them to have more leverage and a tighter spread.
“The concern about California demand is real and something that market participants will try to price. Consumer budgets have come under significant stress. This may be manifested in consumers trading down from beef to pork,” Kalo says. “Or trading down from meat-based meals to less expensive options.”
Demand uncertainty coupled with the price action in the spot market have fall hog futures on the defensive.
“As the last two years have shown, a fall market collapse is far from a foregone conclusion,” he says.
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