As is so often the case, U.S. cash hog prices posted an annual high in late June, with the CME lean hog index peaking at $85.03/cwt (cents/pound) on June 28. The index has subsequently suffered a persistent decline to $76.45. The sustained nature of the price losses has seemingly ended prior hog industry hopes that strong export demand would power a secondary advance to fresh highs in late summer. August hog futures surged to $90.42 by mid-July in anticipation of such a move, but fell to $73.82 last Friday morning before rebounding modestly.
A look at the pork cutout chart above might easily persuade the observer that the recent futures breakdown has been greatly overdone, since pork values have rather clearly performed rather well when the situation is viewed in light of the elevated production coming out of the nation’s hog farms and pork packing plants these days. On the other hand, last week’s dip at a time when pork values are often approaching an annual peak may serve as evidence of the weakness apparently presaged by CME hog futures.
A look at the various individual cuts also suggests the hog and pork industry doesn’t trust the wholesale market at this point. That is, while some cuts are behaving in relatively normal fashion, developments in others probably have industry participants either scratching their heads in wonder or causing shivers at the implications of potential worst-case scenarios. Several examples follow.
This chart plots the price of one-quarter inch trimmed, bone-in pork loins. The pork loin is the second largest pork primal and often rivals pork ribs as the most expensive cut, so it’s the most valuable portion of the hog carcass. The graph shows loin prices rallied strongly from the extreme low posted in mid-April and eventually reached a peak only slightly below comparable year-ago and long-term levels. The industry has to worry about the abrupt and extreme breakdown experienced during June 2016, especially since it was so similar to that suffered last year. I continue thinking a big problem for the pork industry (and even more so for those in the beef business) is the clear reluctance of grocers to pass wholesale price reductions from peak 2014-15 levels on to consumers. For example, the Bureau of Labor Statistics (BLS) reports that center-cut pork chops averaged $3.94/pound in grocery stores last month. That’s down less than 1% from comparable month- and year-ago levels. It’s hard to have a demand recovery when consumers aren’t seeing the benefits of reduced farm and wholesale level quotes. Thus, in the absence of major grilling occasions, I suspect consumers aren’t actively buying pork chops.
Pork ribs often star in the meat case during spring and summer as consumers actively grill spareribs early and often. The five-year average on the chart above shows rib values have recently averaged over $1.75/pound at their early-summer peak. Indeed, 2015 was huge rib year, with prices not only soaring above historical norms despite resurgent supplies, they actually topped their 2014 peak as well. The contrast to their 2016 performance could hardly be more stark, with rib prices ‘falling off the table’ since posting a truncated early-summer high just before Independence Day.
What’s is going on with the rib market? I can’t say I know, but I have theories. First, a reliable market source indicates that beef ribs are also quite cheap and have reportedly stolen some thunder from the pork rib market. Second, I suspect grocers overcommitted to rib features in spring 2015 and were forced to pay up for wholesale product in order to meet their needs when push came to shove. They were probably unwilling to make the same mistake this year. Third, supplies are simply greater this year. Fourth, I suspect grocers maintained retail rib prices at greatly elevated levels despite the depressed nature of wholesale quotes. We don’t have a good handle on grocery store prices, since the BLS doesn’t break out rib costs to consumers.
I believe what has happened in the past greatly affects grocery industry attitudes and actions. Again, over- or under-committing to products at one time seems to cause an opposing reactions later in the year or at the same time the year following. The pork belly market is the exemplar of this practice.
The chart above illustrates this point. Recall the early-2014 situation, with the PEDv outbreak having literally decimated the supply of hogs and pork likely to be available that summer. Many in the industry apparently panicked and tried to line up hog and pork supplies ahead of time, thereby driving the whole complex to levels far above former records in early spring, despite the fact that supplies at that time were still well above normal annual lows seen each summer. The magenta line shows pork belly prices were no exception, rocketing above $2.00/pound and almost doubling the 10-year average. Prices clearly turned lower when the panic was over, then resumed a more normal seasonal advance into summer. Note that the July high, which came very early, also fell far short of the April peak.
Contrast that price action to 2015, when spring wholesale belly prices were very weak. That encouraged grocers to actively buy bellies and feature bacon as spring passed. The result was a summer high at the normal time, with that peak almost matching the mid-year 2014 high despite a huge supply increase. Conditions in 2016 have been even more liquid, but the late-winter strength seen earlier this year discouraged grocers from featuring bacon very actively. So the muted nature of the spring-summer rally hasn’t been terribly surprising. Thus, while we can probably expect belly prices to remain strong and likely set a fresh 2016 high in early August, the market will almost surely prove vulnerable to normal seasonal pressure from that point.
Given the weakness experienced by pork loins and ribs, as well as the mediocre showing being posted by pork bellies, how have pork cutout values sustained the strength implied by the first chart? The answer is the ham market, as depicted by the following chart.
The 10-year average on this chart illustrates the normal seasonal pattern exhibited by ham values. They start the year very weakly in the wake of the holiday season and heavy grocery industry featuring for Thanksgiving, Christmas and New Year’s Day. The ham market usually rallies rather strongly into March as processors and grocers gear up for active featuring for Easter Sunday dinner. Prices routinely set back afterward, then start a long, slow advance as the industry once again gears up for the holiday season. A big portion of that process is the purchase and storing of hams as packers, processors and grocers build inventories for use at that time.
However, as with the belly market, deviations from the norm can greatly disrupt this process. That has obviously happened this year, with ham prices soaring far above normal summer levels. Indeed, they have clearly pushed far above the peak levels seen in 2015, as well as the historical norms implied by the 10-year mean. My source suggests that active export purchases from both Mexico and China have played a big role in the mid-year surge. That’s all well and good, but the U.S. industry probably doesn’t know how long that buying will persist. I worry that the net effect will be a reduction in interest and buying from the domestic industry, with many planning to pursue turkeys more aggressively for the holiday season.
Ultimately, this seems to hold negative implications for the second-half ham outlook, especially if/when export buying declines. I believe industry concerns about the ham outlook are playing a major role in the ongoing weakness being experienced by CME hog futures. Indeed, if the ham market underperforms during the fourth quarter, that could bode very ill for hog prices at that time. That is, not only are hams the largest pork cut, concurrent weakness in most other cuts during autumn causes ham values to take an increasingly important role in supporting hog prices. Given farmer worries that late-2016 supplies could exceed packing industry capacity, the last thing the industry needs is poor ham demand and offtake. There is certainly a chance that recent pork loin and rib weakness will set up the market for an exaggerated September surge, but the late-2016 hog and pork outlook does not look encouraging.
