click image to zoom Lean hog futures closed higher on Thursday despite data showing weaker wholesale meat prices and negative meat margins for packers.
The pork cutout on Thursday was quoted at $84.86/cwt, $5.53/cwt or 6% lower than a year ago. Lean hog values (IA/MN) closed last night at $87.39/ cwt, $6.33/cwt or 8% above year ago levels. The pork meat margin has been negative in the first few weeks of this year (bottom chart) yet packers have been aggressively chasing hogs.
The fact that wholesale pork prices are having trouble keeping pace with the price of hogs should eventually limit the upside in hog values. High pork by-product values and a weaker US dollar tend to benefit packers and they do not show up in the meat margin calculations. It is also possible that packers are willing to give up some short term profits in order to keep market share and be able to fill orders.
In the long term, negative meat margins are not sustainable and the market will have to correct. At this time, futures have been buoyed by the fact that packers continue to bid up hog values even with weaker wholesale prices and the expectation is for hogs to continue to climb into the spring and summer as supplies seasonally decline.
Looking at wholesale prices in more detail, we see a number of areas that should be cause for concern. In our view the dismal performance of ham values so far this year has been one of the primary contributors to the weakness in overall cutout values.
The ham primal cutout closed last night at $65.41/ cwt. (remember this is the primal value not specific ham cuts) was down $9.6/cwt or 13% from a year ago. The decline in the ham component of the cutout accounted for almost half of the overall drop in cutout values compared to a year ago. The decline in picnics has had a similar impact.
The picnic primal has been steadily declining so far this year and the latest close pegged it at $53.87/cwt, $16/cwt or 23% lower than a year ago and accounting for almost $2/cwt of the decline in the cutout. Also negative in the last week has been the sudden reversal in the value of pork bellies.
The belly primal value was trending higher in January and by mid February was as high as $125/ cwt. Since then, the belly cutout has lost about $13/cwt and it currently is down 12% from year ago levels. Ham values could get some residual support from last minute purchases ahead of Easter. However, we think that the peak for Easter purchases is already behind us.
Belly demand should continue to improve on seasonal demand and also preparations for summer business. At current levels bellies look attractive once again for freezer inventories.
Going forward, it will be important to keep an eye on wholesale meat values in general and specific items, such as hams, bellies and picnics. In recent months, Steiner has worked with the National Pork Board to create a dashboard tracking prices of pork cuts.
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