Lean hog futures took a step back yesterday, but the expectation is for hog prices to continue to climb into the summer months and be at over $100/cwt. in June and July. For that to happen, however, we would likely need to see pork cutout values in the $110/cwt range, about $15/cwt. or 17 per cent higher than current levels. Seasonally pork prices move higher into the summer and the market believes that the seasonal will hold this year as well, despite the lofty levels achieved so far. Indeed, we calculate the five year average (2006-10) pork cutout value for early April at $63.75/cwt compared to an average price for July at $75/cwt, an uncanny 17 per cent increase.

It is important to understand what got pork prices to where they are now in the first place. The chart below shows the year over year increase in the overall cutout value (green top bar), indicating that the wholesale pork cutout value on 6 April was up $17.31/cwt. from a year ago.

A few points stand out. The main one is that even though ham and loin primals account for about 50 per cent of the overall carcass, their combined increase is only $3.66/cwt. higher than a year ago, thus contributing only 21 per cent to the cutout value gains. The bulk of the increase in the pork cutout has come from belly prices, a point we have made before but which bears highlighting. The pork belly primal value was quoted on April 6 at $147.75/cwt, $9.48/cwt or 67 per cent higher than a year ago. Even though bellies account for 16 per cent of the carcass, they have contributed more than half of the overall increase in cutout values. Pork belly prices have never been so expensive so early in the year. And the expectation is they will be even higher this summer as retail demand picks up while pork supplies seasonally decline.

One factor supporting belly prices is the sharp increase in foodservice breakfast demand. A number of large operators have rolled out or are in the process of providing breakfast offerings. From McDonalds, to Starbucks to Subway, customers now have an array of breakfast options, with bacon seeing expanded use in both the morning and lunch menus. Last year there was a lot of talk about the “BLT season“. But the fact is that seasonal summer demand is always there, what has really changed is that retail customers now have to compete with a lot of foodservice operators whose demand is somewhat inelastic due to the rigors of standard menu offerings. In the past, operators built belly inventories in the spring but, so far, belly stocks are running well behind normal as buyers balk at putting $150 bellies in the freezer. Also important to note is that belly demand so far this year has also been driven by strong export sales to S. Korea.

As noted above, the expectation is for wholesale pork prices to continue to climb. Bellies have carried the market so far but belly prices would need to be much higher to support cutout values in the $110 range. At what point do these higher prices cause buyers to walk away? One item that bears watching are hams. Ham values seasonally bottom out the week of Easter but then should trend higher in July and August. Pork loins, on the other hand, will likely continue to be challenged by relatively inexpensive chicken breast offerings at retail.