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CME: Hog Futures Pulled Back Sharply

24 August 2012, at 12:52pm

US - Lean hog futures have pulled back sharply in the last two trading sessions as market participants worry about pork prices going into the fall, write Steve Meyer and Len Steiner.

The nearby October Lean Hog contract closed on Thursday at $72.575/cwt, 323 points or 4% lower than just two days ago. This was a new contract low. The December contract also settled at a contract low of $70.6/cwt, about $10/ cwt lower than where it was at the beginning of the month. Hog supplies seasonally increase in the fall (hence the seasonal dip in prices) but the recent jump in hog slaughter rates caught some by surprise. Weekly hog slaughter is currently running about 6% ahead of last year’s pace. Producers have accelerated marketings as projected losses increase with each upward gyration in feed values. From corn to soymeal to DDGs to wheat, feed inputs are all sharply higher than a year ago and there is no benefit in waiting to bring hogs to market.

Part of the problem may be that producers slowed down marketings in July and early August, benefiting from the rally in hog prices and the rise in the price of key wholesale items (bellies, hams). Hog slaughter, based on weekly data, averaged about 1% below year ago in July. This was well under the 1-1.2% increase implied by the June hog inventory survey. The slowdown did not do producers any favors. As marketings declined and hogs spent a few more days on feed, hog weights responded and the results can be seen in the attached chart. Based on the latest MPR data, hog weights are now averaging almost 202 pounds per carcass, 2.2 pounds or 1.1% higher than a year ago. Pork supplies are currently running about 7% over year ago levels and this kind of increase has proved difficult for the wholesale markets to digest.

Prices for a number of items, from trimmings to hams to pork loins, are down sharply in order to clear the market. Trim values have taken a significant hit, wit the benchmark 72CL trim last priced at around 61 cents per pound, 15% lower than where it was trading last week. Hams, which tend to carry the carcass in August and September, currently are trading at 71 cents per pound, 10% lower than were they were a week ago and some 20% lower than a year ago. Even pork bellies, an item that was flying high for much of July and early August, have started to show weakness. Bellies account for just 16% of the carcass but their strong performance allowed to pork cutout to hold up until recently. Normally belly prices decline into the fall and with most other items also performing poorly, the fear is that the cutout could decline by more than previously thought.

Increasing sow slaughter rates will also add to the amount of pork coming to market in the coming weeks. Sow slaughter, reported with a two week lag, is currently running about 7-10% above year ago and some expect the liquidation to be even larger in the fall. This could add an additional 3 MM pounds of pork (carcass wt basis) to the weekly tally of pork production.