There was plenty of speculation last week that the winter weather disruptions could cause hogs to back up and weigh on prices in the coming days. So far, however, the response in the pork cash market has been anything but negative and the pork cutout has been steadily climbing since the start of the year.

On Monday evening, USDA quoted the overall pork cutout at $88.87/cwt, a whopping $20.05/cwt or 29.1% higher than the same time a year ago and just a few dollars shy of the all time record levels established last year. The nearby February lean hog contract gained 45 points and closed at $84.95, about $2 over the IA/MN cash price.

We  compared to the previous two years as well as the trend in cutout and hog prices since January of last year. One thing hat is quite obvious is that the spread between the cutout and hog carcass remains notably bigger than a year ago, an indication that packer profits are in good shape. Normally this is the time of year when packer margins get a bit tighter but so far it appears that pork demand remains in great shape and this is fueling hog futures as well.

The June 2011 contract closed on Monday at $101.35, a new contract high and the highest futures hog price we have seen. The strength in cash pork prices has been broad-based, with all the cutout components contributing to the year over year increase. Some items, however, are doing much better than others and they offer clues as

to what’s driving cash prices at this time. The most notable gain is in the price of bellies.

While USDA did not provide a quote for any specific belly items (the mandatory reporting cannot come soon enough), it did quote the belly primal at $118.13/cwt, $4.95/cwt or 35% higher than a year ago. Even though bellies account for 16% of the weighting in the cutout index, they contributed 25% of the increase in cutout value.

A number of factors have contributed to the strength in bellies. Export demand is strong, with Korea reportedly very active now that 50,000 MT of bellies can enter tariff free. Also, US end users remain very concerned

about belly prices in the summer months following the debacle of a year ago. We suspect a lot of them are running hard to build inventories.

We also have noted reports of large users jumping on the breakfast bandwagon (Hardees, Wendys), which often includes the ubiquitous bacon and eggs. The pork butt primal was quoted on Monday at $103.84/cwt, $3.84/cwt or 56% higher than a year ago. Ham prices are up 16% from a year ago but prices have not increased as much as the overall gains in cutout values.

We should start seeing ham demand pick up going into Easter although this year Easter is one of the latest on record, and this will delay and diffuse the seasonal pick up. Overall, the story in the pork complex is that cash markets remain strong, and this has helped propel futures higher despite weather disruptions and heavy carcasses.

The Daily Livestock Report by Steve Meyer and Len Steiner

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