While the nearby August hog futures contract climbed to a new all time record high on Wednesday, deferred contracts took another step back as market participants considered the potential for a global recession. October lean hog futures closed on Wednesday at $86.85/cwt., 227 points lower than the previous day and 540 points lower than the previous week. December futures closed at $83.25/cwt, 220 points lower than the previous day and 567 points lower than a year ago.

The reversal in hog futures has for the most part followed the tumult in outside financial and commodity markets even as spot cash prices remain at record highs. Pork prices this summer have been supported by strong export demand, particularly from China, and lower supplies due to lighter hogs coming to market. A global recession would be detrimental to US pork demand, particularly as US pork supplies tend to increase in Q4. Last year hog prices slumped during the last three months of the year as heavy hogs hit the market.

Also important to remember is that product demand patterns change as we go into the fall. As was the case last year, pork bellies are once again trading in the $160 range and helping boost overall cutout values. Once the seasonal demand for bellies dries up, normally after Labor Day, other items will need to pick up the slack. Last year, belly prices dropped sharply from a high of $160 in mid September to as low as $88 in late October. When that kind of drop takes place, it becomes all but impossible for packers to replace the lost value by putting more money on other cuts. Going into the holidays, ham values tend to carry overall carcass values.

Ham freezer stocks are currently running well above year ago levels and domestic demand has to be excellent to allow for the kind of price appreciation implied by current futures. But bellies are only part of the story. The latest USDA report pegged the hog cutout at a little over $110/cwt, some $21.4 higher than a year ago. Almost 40% of that increase is due to higher loin values. Pork loins have been
a difficult item for retailer for years but they now present a good value in the meat case given higher prices for beef cuts.

As with bellies, loin demand tends to wane going into the fall. This makes it even more difficult to sustain cutout values once grills are retired into sheds and basements. Bottom line: Keep an eye on hams, they need to trend higher if hog prices have any chance of sustaining +$80 levels into the fall.