Thoughts from the backside of World Pork Expo and before NPIC

An advancing belly print in the cutout will likely lead to a bump in the futures.

Joseph Kerns

June 17, 2024

5 Min Read
National Pork Board

With World Pork Expo behind us and the herd getting ready for Wisconsin Dells next month, we are in what should be at the pinnacle of our glory as summer markets are normally our saving grace. Why, then, does this year not feel quite so joyful? I think a lot of it has to do with expectations not being met (yet?) while a look at the math may indicate that we are approximately where we “should” be and there is still reason to be optimistic about the July and August contracts.

Per the attached scatter, courtesy of Dr Steve Meyer, domestic demand is trading at or near the trendline that was represented by the profitable COVID timeframe – this is not all bad. A large part of this upward shift is retail quantity is being constrained by excellent exports. Excellent in terms of both price and quantity, those two things do not normally coincide – this is cause for a light celebration (polite golf clap?) and may set the tone for optimism after the June expiration. Let's unbundle a couple of items.

Kerns_Fig_1_061724.jpg

The ride down the elevator shaft from our highs in the summer markets has been rough and our seemingly unfounded optimism when we were trading near $110 is now evident. Instead of carrying a premium to the index, we are now on par (and have even slipped to a discount at times) which means we have taken most, if not all, of the air out of the balloon.  What is necessary to move us to higher prices?

Lighter weights

So far this spring, weather has been conducive to pigs eating well and weights remaining stubbornly high. That is going to change. From a meteorological standpoint, there are things that are easy to predict and others that are hard. Wind speed and direction is generally a pretty safe estimate as it is controlled by macro atmospheric forces that manifest themselves both on the ground and aloft. Put this one in the easy bucket. Rain, on the other hand, is a fickle beast that plays with energy in the atmosphere and a moisture source that can be triggered. 

I really like the attached precipitation graph that shows the trends in moisture that are reasonably straightforward. Systems lose their moisture as they cross the Rocky Mountains (you skiers can be thankful for this as it populates your favorite slopes in the winter) and it takes a bit of time to rebuild as the jet stream moves systems from west to east – hence, the dryness in eastern Colorado and western Nebraska. The southeastern United States gets the benefit of moisture coming north out of the gulf colliding with these energy waves and providing heavier rains in that area. It all makes sense.

Kerns_Fig_2_061724.jpg

The third major variable is temperature, this one lays between wind and moisture in the ease-of-prediction scale and probably is a little closer to wind – we generally have some confidence in our temp outlook. Temperatures (especially nighttime) are a predictable indicator of animal intake. Take a look at the attached forecast map. There is a high degree of confidence that we are going to be hot through the end of the month. Keep in mind, these maps are in comparison to “normal” so it recognizes that it is warm in the summer, it is going to be even hotter than usual. 

Kerns_Fig_3_061724.gif

It is all about the belly

So far, the packer and the further-use sector has had their way with the belly market. Can we see a run back to $160 in this cut? Our guys say “yes”, that is a real possibility. An advancing belly print in the cutout will likely lead to a bump in the futures and – if history is any guide – the momentum will lead to an overrun of equilibrium. That is good for our team in an upward trending market, it has been punishing on the way down. 

Fund money movement

I wrote last month about the influence of money flow in and out of our agricultural futures markets and how price is indexed to the motion. This one is no different. We are on the backside of one big fund roll, we are on the cusp of another that could bolster the summer months. IF (that was intentionally capitalized as in a big IF) we experience a meaningful fundamental advance that coincides with a money roll, this could be the opportunity we have been hoping for to secure summer coverage.

A couple of things in closing. That same heat that will be occupy much of our pork production area will also impact the region where we grow corn. Right now, the maps are allowing moisture to move which is triggering rain. The amplification and retrograde of the summer ridge will keep the market on edge until after pollination. I would rather be a buyer of corn than a seller at today’s levels given the production threat and balance sheet impact. 

Finally, many of you were able to attend the Dr. Steve Meyer sendoff at World Pork, it was a great testament to his life and career. Dr. Meyer will step back on Aug. 1 and a very capable gentleman will take the reins. Dr. Lee Schulz is not a stranger to the pork industry given his 12-year run at Iowa State. Lee has demonstrated competency and leadership while in Ames, and he has agreed to join us at Ever.Ag to continue the industry leadership that was the hallmark of Dr. Meyer’s efforts. Please join me in welcoming Lee into his new role. We have every confidence in his success.

Comments in this article are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals. Contact Kerns at [email protected].

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