This spring, just as butcher hog supplies began to taper off on a seasonal basis, an unusual thing occurred. After experiencing a sharp run-up in wholesale beef prices, domestic end users suddenly moved away from beef and initiated a massive switch toward pork. This shift appeared to occur just as hog numbers were tapering off. The result was a gradual decline in wholesale beef prices and a sharp jump on wholesale pork prices.
Indeed, the choice beef cutout has been drifting down from record high territory while pork values soared, eventually reaching record high territory themselves. During this period, beef exports have been running slightly higher than last year while pork exports have been very sluggish, running consistently below last year. In fact, through May, pork exports have been down 9 percent compared with the same period last year.
The vast improvement in the value of the pork carcass, or the cutout value, sent cash hog prices sharply higher as packers were in competition for available animals for slaughter. Eventually this competition resulted in a loss of processing margins as the cash hog market began to outperform the advance in pork cutout values. It would appear that the function of the market has indeed done its job. In this particular case, pork product values were driven to such high levels that demand cooled, went elsewhere.
The most dramatic move among the pork primal cuts occurred in pork bellies. Pork belly prices appeared to have topped at $1.85 per pound in the third week of June. This price level surpassed the previous record high belly price of $1.64 established, I believe, in August of 2011. The ham market, which is referred to as the other processing cut (on contrast to a retail cut) has edged higher but not nearly as dramatic as bellies. Ham prices are currently near their recent highs (but not all-time record highs) near 95 cents per pound. In early April the ham market was trading from 62 to 64 cents. At this price level, again, demand for hams is expected to taper off.
Prices of the major retail pork cuts, the loins and butts also have enjoyed impressive price strength. For example, pork loins started the year trading near $1.05 per pound. A rapid advance in prices started in May and continued during June for the reasons discussed above. It appears that loin prices may have peaked near the end of June at nearly $1.50 per pound. Pork butts, another popular retail cut have moved from 83 cents per pound in January to a peak at the end of June near $1.35 per pound.
The resulting value of the pork carcass, the pork cutout value appears to have recently peaked at a record high $111.33. The pork cutout value started the year trading at a value near $81.50. The last available quote in the pork cutout, as of July 12, was $101.48. Thus, the pork carcass is already trading substantially off its record high.
The August lean hog contract was in a down trend after peaking in the fall. Prices had been working lower from a peak of $100.00 in early December until a low was made in mid-March, early $88.00. The market proceeded to chop back and forth, without trend for the next 60 days. Finally, in mid-May a significant upward move started, fueled by the massive switching from record high beef to much cheaper pork (discussed above). During the period of about 40 days, the market rallied sharply from the $89.00 level to the recent high of $99.85. Recently, the August hogs have pulled back from these highs and the chart pattern appears to have formed a large head-and-shoulders top. This top formation provides a downward target or projection of $92.00. First line support can be expected at $94.00, with the final target near $92.00.
The October lean hog contract also bottomed out in mid-May, near $80.00. Prices rallied until late June with this contract peaking at $87.00. Two items to note, the size of the rally in the October was not a great as in the August and the peak in the October chart was substantially below the peak from last fall. While this contract does not display the head-and-shoulders top as the August does, it would appear that October hog futures have indeed topped. Based upon the fundamentals involved, including a large seasonal increase in pork production in the fall, widespread expectations that corn prices will decline and fear of expansion in the U.S. hog industry, look for substantial downside risk in the October hogs prior to their expiration. The contract is trading near $84.50, roughly 250 points off its recent high. Many in the trade, including myself, believe this contract could possibly weaken to the $77.00 to $78.00 by fall.Information contained herein is based on what is believed to be the most reliable resources available at the time of publication. Trading commodity futures or options involves risk, and past performance doesn’t indicate future results.
Dennis Smith has been a commodity broker for 26 years and works extensively with livestock and grain producers. Dennis publishes a highly respected and widely followed “daily livestock wire,” which is part of his brokerage services. A free 30-day trial to the livestock wire can be requested by emailing Dennis at email@example.com or calling 877-377-7905.