Seasonally, hog supplies increase as weather cools off (higher weights) and more hogs come to market.
But seasonality in hog prices in hardly a surprise. It was known to market participants all along and still they were willing to push October futures at almost $94/cwt.(8/2).
Since then, October futures have lost almost 700 points and there is plenty of fear that the recent pull-back in pork prices could herald a repeat of last year when pork cut-out dropped in the mid 70s by late October (see chart).
So what has changed since early August? Back then, bears were arguing that summer prices were inflated by the sudden surge in Chinese export demand. They thought Chinese purchases were temporary.
Also a factor that the authors noted repeatedly in this report was the sharp decline in hog weights. This further limited output and forced end users to bid up spot prices.
As those factors were rectified going into the fall, the expectation of bearish observers was that pork and hog prices would pull back by more than what futures were indicating at the time. Bulls, on the other hand, argued that pork export demand would continue to be a factor and keep prices at elevated levels through the end of the year.
High feed costs and limited feeder pig imports from Canada were also seen as a driver. And while $90+ hog prices would be unheard of for October, so were $106 hogs for early August and we surpassed those levels.
At this point, bears appear to be in the drivers seat as evidenced by the sharp drop in cash hog values.
On Wednesday (24 August), the IA/MN lean hog price (wt. avg.) was quoted at $95.18/cwt, still some $13/cwt higher than a year ago but $11/cwt lower than the annual peak in early August. One argument for the lower values are rising carcass weights.
However, USDA Mandatory Reporting system reported hog weights for Tuesday (23 August) at 199.17/lb per carcass, slightly lower than a year ago.
It is possible that packers are seeing a slow-down in export orders but that is only speculation at this point. One item that has been particularly negative for the pork cut-out are bellies.
The belly primal (which is 16 per cent of the cut-out) was quoted on Wednesday at $126.64/cwt, $26/cwt lower than just 10 days ago.
During the same period, the pork cut-out has declined from $109.45 (on 15 August) to $104.04 (on 24 August).
The drop in belly values has accounted for almost 80 per cent of the drop in the value of the cut-out.
What happens if/when demand for other primals, particularly loins, softens up after Labor Day?
Ham prices have been relatively weak to this point and they need to appreciate significantly to support the cut-out levels implied by October futures. Trim and drop credits can help you only so much.