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A Story of Pig Disease, Lemons, and Bitter Lemonade

This is a strange story about the scourge of the new pig disease, PED virus, which seemingly came out of nowhere to kill 8 to 10 million pigs in the last 18 months. Here’s the surprise: From a strictly economic standpoint, well, it’s a windfall to many pork producers; the ultimate lemons-into-lemonade outcome. But in this case, the lemonade is still bitter.

It’s all a result of the apparent inelastic supply-demand nature of pork. A 10% drop in supply (that’s the share of pigs lost) is giving considerably more than a 10% price bump in the opposite direction. The net result is that if a pork producer suffered average losses to PED – 10% - he/she is going to make more money in 2014 than if the disease hadn’t hit at all because prices are 20% to 25% higher due to the industry-wide shortage.

That’s the message Steve Meyer brought to the World Pork Expo in Des Moines this week. He’s the president and pork market outlook expert at Paragon Economics. “It may end up being your best year ever for hog profits,” he told producers at his seminars. “And we don’t like it because nobody likes seeing dead pigs.

“It’s an unusual disease threat in that it is supply-altering. It’s a way different impact than if it was demand-altering,” Meyer said. “PED is not a threat to human health.”

He went on to say the situation points out just how strong is the current demand for pork (and some other meats). That sort of flies in the face of most economic predictors. The general economy is sluggish in its recovery with very slow growth in consumer spending power. Still, relatively expensive meat is moving briskly through retail channels at record-high prices. Total consumer expenditures for meat should set a new record this year. “My conclusion is that consumer preference for meat is really strong,” said Meyer. “People want protein in their diets, and there’s lots of buzz in the medical community around that right now.”

Without PED and the heavy pig losses, Meyer says pig prices this summer probably would have peaked out around $110/cwt (lean carcass basis). With costs to produce pigs down to about $82/cwt, that still would have allowed for excellent profits.

But the big supply shortage of slaughter-ready pigs is just now starting to hit full force. The biggest losses to PED were last January, when as many as 1.3 million pigs died shortly after birth. Those pigs would have come to market in July and August. Pig prices have already been as high as $130/cwt ($20 above Meyers’ pre-PED projections), and they might get back into that range again as the shortage kicks in. “I predict that pig slaughter numbers will be down 13% to 14% in August and September,” said Meyer. “Average prices in the third quarter of this year will average $116 to $120, then drop back to about $98 in the fourth quarter.”

Some of the pork supply shortage will be made up for with heavier slaughter weights, which he says could add 3% to 4% back to the short supply. But that means taking pigs from 270 pounds to 285, and at that size, there gets to be some pushback from retailers for pork cuts being too big. It’s why we can’t simply feed pigs to 300 pounds or more to fully make up for the numbers drop.

Meyer said he’s concerned about the effect of the pig shortage on rural communities that rely on pigs to keep people employed. For instance, pork packing plants are already making plans to curtail work hours this summer. He doesn’t expect plant closings, but some will cut back to 32-hour work weeks. “That takes 20% of the income out of a worker’s hands, and that is felt by local businesses.”

Longer term, said Meyer, it’s just too hard to tell what the impact of PED will be on the pork industry. “We need to get another winter under our belt,” he said. “Will PED linger? Will we develop and adopt an effective vaccine? Will we add more sows and learn to live with it?”

Studies show that about 58% of all sows have been exposed to PED and now should carry at least some level of resistance. Will that lower the outbreaks and severity of the disease, which tends to peak in cold-weather months? “I expect us to have another tough winter to get through to know some of these answers,” Meyer said.

On the feed side, Meyer thinks most of the bad news is now behind the pork industry. With the corn crop off to a good start, he sees the potential for a near 14-billion-bushel harvest this fall. That could push corn prices to near $4 a bushel or below, and push the costs to produce pigs below $80 per cwt next year.

Soybean meal is another story. Stocks are not tight, but world demand (especially China) could bring a price spike later this summer of over $500 a ton. Then, Meyer expects a big crop of soybeans this fall will bring soybean prices back down.

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