Sort & Cull

The cash hog market has blasted into 2017 with an impressive head of steam. In less than two weeks, the negotiated dressed market has rammed more than $7 higher. Indeed, with the national weighted average set to end the week in the low $60s, relieved pork producers are being treated to their first taste of black ink since late summer.

But weren't the headlines and analytical claptrap following the Dec. 1 Hogs and Pigs Report consistently bearish? So who's giving the early year party?

Interrogating the two traditional suspects (i.e., supply and demand) provides a few helpful hints. For starters, the slaughter mix has certainly shrunk since ringing the 2.5 million bell several times in early December. While the holiday schedules (i.e., Christmas, New Year's and Martin Luther King Jr. Day next week) make it difficult to get a good early year read on the realities surrounding chain speed, I see no reason to doubt that first-quarter tonnage will be seasonally more manageable than the Oct-Dec period.

Second, there's a growing amount of evidence that both domestic and foreign pork demand is in fine fettle. Regarding the latter, it was reported earlier this week that U.S. pork exports in November set a new monthly record at 225,800 MT, 24% above the same month in 2015 and smashing the old all-time record set in October 2012.

Furthermore, this huge shipment represented no less than 28% of commercial production in November.

Did I mention that the U.S. dollar was notching new 13-year highs at about the same time?

As fruitful as these old standbys seem to be in explaining the firm tone of early week, I think one less leaned-upon factor deserves the fifth degree. Specifically, the hog market is currently experiencing a major shift in profit-center potential within the industry: Record-breaking packer margins are eroding and farm margins are finally improving.

While most would agree that fourth-quarter processing margins were simply too hot not to cool down (e.g., netting over $50 per head in late November), it seems a little puzzling to see packers surrender so quickly, especially in the wake of a quarterly hog inventory that looked quite bearish in terms of near term supply? For what it's worth, I have a possible explanation.

Could it be that packers simply believe a consistent 4% rise in market-ready numbers (i.e., as documented by the Dec. 1 marketing schedule) is simply a USDA myth? Given their unique position is assessing the real population of nationwide finishing floors, are packers shifting to spendthrift mode exactly because they can tell the early year numbers are not out there.

This possibility may not be as wild as it sounds. When the gov first published its jam-packed inventory last month, many analysts and traders were skeptical, arguing that the unexpected surge in fourth-quarter slaughter was just as explainable in terms of polling market hogs forward as it was in terms of a surprisingly large spring pig crop.

Right or wrong, USDA accountants assumed the latter, increasing its previous March-May pig count by roughly 750,000 head. On the other hand, live hog weights sailed through the final quarter of the year nearly 4 pounds lighter than 2015 (note that when the third quarter ended, weights were virtually even with the prior year).

Some have argued that in order for the scale to slip that much on the previous year, hog producers would need to accelerate the marketing schedule by two to three days (i.e., pulling approximately 750,000 barrows and gilts in the process).

So who's right? Tough to tell at this snapshot, but the bullish possibility is more than a little intriguing. It goes without saying that weekly chain speed over the next two months will be very critical to monitor.

For more of John's commentary, visit http://feelofthemarket.com/…

(ES)

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