- Hog slaughter has declined from 2.45 million head/week in early May to nearly 2.3m hogs currently. Additionally, hog weights have declined at a faster rate than normal, further reducing spot availability.
- Buyers have stepped back into the market as there is more clarity about Prop 12 rules after July 1. We still think there will be a hit to pork demand but in the near-term distributors are looking to get inventory before enforcement goes into effect.
- Loin prices continue to steadily gain ground, supported in part by higher prices for ground beef. There is a lot of uncertainty how loins will perform in July and August but the biggest downside price risk in our view is after September.
- Ham market continues to be well supported due to the seasonal decline in supply and export sales. California Prop 12 impact on ham will be more limited since cooked product is excluded.
- Belly market has seen a modest uptick and should see some additional improvement in Jul/Aug. Fast food demand remains a major negative for bellies, however.
Futures Rally On Higher Cash Hog Values And Cutout Gains. Tight Summer Supplies And Seasonal Demand Driving Rally For Now
Hog futures have been steadily gaining ground in the last three weeks, as if market participants suddenly woke up to the fact that hog supplies decline in the summer. Other factors have likely contributed to the rally as well, with sharply higher beef prices expected to push retail prices higher in July and August, and producers aggressively marketing hogs in the last three months, driving weights as much as 2% under year ago levels. Proposition 12 was the sword hanging over the market once the Supreme Court decided to leave the law in place. But, even on that account, end users appear a bit more relaxed after the CA Department of AG offered some clarity on the situation.
Since May 24, the pork cutout has gained $15/cwt (+19%) while cash hog values have gained $13/cwt (+16%). The gains have been steadily pushing the cash hog index higher and, at least in the near term, futures participants expect the trend to continue. The biggest gain, both in percentage terms and value, has been in bellies. The belly primal during this period has gained 45%, contributing about a third of the overall increase in the cutout. Other primals have also contributed, with the ham primal value during this period up 16%, adding $3/cwt to the cutout. Loin prices have been steadily moving higher as well but they remain well below 2021 and 2022 levels. We suspect that more competition from chicken has kept loin values in check while higher prices for beef have helped other fresh items, such as butts and picnics.
But as market participants look forward, they will still have to ponder several things and calibrate price expectations. In our mind the hit to demand from Proposition 12 remains a big wild card and for all the speculation out there, we don’t think anyone really knows how it will play out. For now, retailers are breathing a sigh of relief that the new rules will not ruin 4th of July features and that they will get to clean up inventories even after the holiday. However, as the chart to the right shows loin prices tend to erode after September, even during strong demand years. It is more a function of supply than demand. Currently October cutout futures imply a loin primal value that’s close to what it was last year. Time will tell if that’s reasonable but clearly it’s a risk area.
Then we have to contend with bellies. Ample inventories have helped keep belly prices in check and one can reason that once those inventories get cleaned up, belly prices may find some support. The flip side is that there is a reason why bellies got backed up in the freezer. Bacon sales slowed down in the spring as retail and foodservice prices increased. That’s changing The latest retail feature prices suggest that retail prices are now $1 lower (-17%) than a year ago. That should help in July and August when retail features usually perform well. But the foodservice picture is more complicated as bacon depends on sales of burgers, chicken sandwiches and breakfast offerings, not just a lower retail feature price. At this point, we see downside risk to our belly forecast for Q4.
Steiner Consulting Group produces the National Pork Board newsletter based on information we believe is accurate and reliable. However neither NPB nor Steiner and Company warrants or guarantees the accuracy of or accepts any liability for the data, opinions or recommendations expressed.