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CME: Cutout Values Continue to Rise

by 5m Editor
8 August 2011, at 7:37am

US - USDA’s estimated pork cutout value set another record last week and one of the interesting contributors to the cutout strength is, perhaps, the “lowliest“ of pork wholesale cuts — 42 per cent lean trimmings, write Steve Meyer and Len Steiner.

As can be seen below, the estimated cutout value has kept rising as this summer has progressed.

Prior to 2011, the highest weekly average cutout value ever recorded was last August at $94.99/cwt carcass. Beginning the week of 15 April when the cutout hit $95.90/cwt, this year’s market has set nine new weekly average records, including record-highs in each of the past six weeks culminating with last week’s first-ever weekly average value above $100 — $102.55/cwt.

Composite primal values for loins, butts and picnics have also set records at one point or another this year and ham and belly composite primal values have gotten close to their record levels.

We believe hams will likely set new records this fall given demand from China and Korea and the lessening and impending removal of the punitive tariff that was imposed last year by Mexico over our dispute regarding Mexican trucks operating within the US.

Short version: virtually every cut is high priced at the moment. The unusual one is 42 per cent lean trimming. This product is commonly referred to as “fat“ trim — not the most marketable name in this fat– and calorie-conscious world.

And yet last week, this product sold for an average of $82.43/cwt, within $6.00/cwt of the value of the generally more popular 72 per cent chem lean trimmings.

Why the strength? First, while far from sexy, 42 per cent chem lean pork trim is a key ingredient in many sausage products.

The great flavor of hot dogs, smoked sausage, kielbasa and many luncheon meats is, at least in part, due to the flavor added by pork fat and “42s“ are a major source. Want to make a tasteless protein better? Add pork fat or 42 per cent trimmings.

Second, the rumored activity of China in the US market is quite real and their practice of purchasing pork carcasses instead of cuts is having an unusually heavy impact on 42s. China prefers to buy three-piece frozen carcasses and then process the products after receiving them.

Our “normal“ export business is done in primal or boneless cuts. Removing low-value, high-bulk components such as skin, bone and fat is usually desirable in order to deliver the highest value per pound and to spread freight costs over higher-value product.

But that is not how the Chinese choose to buy and their purchasing of carcasses means they get all of the trimmings that those closely-trimmed and boneless cuts usually leave behind. The result: record high trim prices.

This is by no means unprecedented. It is no coincidence that the record for 42 per cent chem lean trimmings prior to this year was $90.00/cwt in the summer of 2008 during the last surge of Chinese buying in the US market.

The most direct beneficiary of recent Chinese purchasing is Smithfield Foods. The reason is that Smithfield’s vertically integrated system can more easily deliver carcasses that have not been fed ractompamine (sold in the US as Paylean), a non-hormonal growth promotant approved in most countries but still banned in China.

This is not to say that other producers do not benefit. The “diversion“ of a chunk of Smithfield’s output to China creates opportunities in the US and other export markets.

Backfilling these "missing" supplies is a major force in the current pork and hog markets.