Mixed Signals in the Market as Some Items Struggle, Others Trade Firm

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The cure for high prices is high prices

Backribs last year peaked at a record high of $528/cwt, more than double what they were in 2019. Roughly at the same time, chicken wing prices at wholesale also hit record highs at $331/cwt, a 75% premium compared to where they were in 2019.

The reasons for the spike last year were a combination of pent-up demand from the pandemic, restaurants finally opening without restrictions and lack of inventory. Normally end users will have enough supply on hand to act as a buffer.

Backrib and sparerib inventories start accumulating in the previous fall to meet grilling demand as well as the normal demand from foodservice. At a time when the supply chain was stretched and spot availability was limited, retailers still had merchandising plans in place and foodservice operators had not updated prices in their menus.

The response has been swift, as can be seen in the above chart. While we thought prices for these two staples in restaurant and bar menus would tend to follow each other, we were surprised as to how closely they have tracked in the last two years.

This is also a reminder that as hot as meat prices got last year, the true test comes when end users try to pass along the higher prices to the consumer. This becomes even more difficult when inflation of key spending items, such as housing, fuel, power, education, and health care crowds out dining out expenses.

We think prices for these items at some point will once again become attractive enough to encourage end users to either start promoting them again or accumulate them in the freezer. But at this point they will need to “buy” their place in the menu again.

The reason for the popularity of wings and backribs in recent years is the shift away from fat free towards flavorful. We think fundamentally these items should be priced above current levels but in the near term the market may swing too much in the other direction before it finds the appropriate level.

As to what is near term, that is especially difficult to say, it could be a few weeks or it could stretch to 3-4 months. What we do know is that current prices represent excellent value, especially in the current environment. It is a matter of time before retail and foodservice operators see this and react accordingly.

Hog prices remain firm, limiting slaughter and bolstering pork prices in the near term

Hog carcass weights, at least for producer owned hogs, have been following the seasonal trend so far this summer, pointing to current supplies of hogs on the ground.

We continue to see a wide spread between the average weight of producer-owned hogs, which would impact the cash market, and the average weight of packer-owned hogs.

In the five business days ending July 11 the average weight of producer-owned barrows and gilts was 208.4 pounds per dressed carcass, down 4.7 pounds or 2.2% since early June.

The average weight of packer-owned barrows and gilts for the same period was 217.8 pounds, down 5.7 pounds or 2.5%.

The current spread of 9.5 pounds per dressed carcass is not as high as it was earlier this spring but it is on the high end of the 10 year range. Previously the only time we saw this kind of weight spread was in 2020, when packers backed up supplies of hogs on the farm.

Why would the spread in weights be so large this year? Our guess is that some packers tried to get ahead of any potential shortfall in hog supplies this summer, getting hogs to heavier weights and helping offset any shortfall in supply. Slaughter capacity does not seem to have been an issue for much of this year and the labor situation appears to have improved as well.

As producers, especially in the Upper Midwest, remain current, this continues to underpin the value of the cash hog market. For all the day-to-day volatility in the cash price, hog values have been trending higher for much of the spring and summer and they are currently above year ago levels.

This contrasts with futures and cutout, which are running below last year. Packer margins may have been compressed, but they continue to bid on hogs and pay asking prices.

One of the questions that is rightly asked is whether the cash market matters anymore.

The short answer is yes, although not as much as before. For futures traders, what matters is both the cash hog market and wholesale pork prices.

Over the years producers and processors have developed a number of ways in which to price hogs. Negotiated trade volume so far this year represents 1.3% of the hogs traded.

However, the prices derived in such trades were one of the inputs used in the formulas used to price a lot of hogs. Year to date, the hogs priced on a swine or pork market formula represented 28.23% of the total.

This remains the largest category of hogs traded and it is also what the CME uses to calculate the CME Lean Hog Index.

Because the cash hog market, thin as it is, makes up an input in the formulas used to derive the CME Lean Hog Index, there is still a very strong relationship between cash hog prices and the index itself. That relationship appears to change from one year to the next because new formulas are negotiated all the time.

During Jul – Nov 2021, a $1 change in the cash hog price resulted in a $0.72 change in the CME index. Since then, a $1 change in the cash hog price implied a $0.64 change in the index.

The effect of the cutout on the index has become more pronounced but that does not mean that cash hog values don’t matter.

This is an important consideration when we think about weights and slaughter in the next 3 weeks and implications for the August contract.

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