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Despite Moderation, Hog Profit Outlook's Cheery For 2015

The hog market has been a good place to be in the last year. Live hog prices in the last few months have trended almost $20 a head higher than the same period in 2013. So, what's the outlook heading into winter?

Feed supplies remain low, and that's likely to be the case through the next year, likely underpinning profits for the hog sector through that time. And, with consumer demand continuing strong, there's not a lot of incentive for the market to slide sharply lower, though some moderation from recent skyrocketing prices is likely in the next few months, says one economist.

"Wholesale pork prices reached their highs in July and have now had three months of moderation. Retail prices tend to lag wholesale prices by three to six months, but the official October estimate of retail prices shows some consumer relief as prices fell 7¢ per pound, the first sign of lower prices in nearly a year. Retail pork prices should continue to moderate somewhat through 2015 as pork supplies increase," says Purdue University Extension livestock economist Chris Hurt. "Consumers have not complained much about retail pork prices, which averaged $4.14 a pound in October according to USDA's estimate of the average grocery store price of pork. The reason is because beef prices were at $6.24 a pound, making pork look like a bargain at $2.10 a pound lower than beef."

The key to sustaining overall higher prices despite a moderation from the market's spike earlier in the year is in how the industry handles something that was behind a lot of panic-induced market action earlier this year and late last year: PEDv. The porcine epidemic diarrhea virus caused major knee-jerk reactions in both how the herd was handled and how the market reacted late last year and through the first half of 2014. Now that the disease is seemingly under control, a sigh of relief has washed through the market. However, supply levels resulting from major culls stemming from the disease will continue to pace the industry moving forward.

"Looking back on the year, it seems clear that the old adage of buy the rumor, and sell the fact may be the best way to characterize this year's price pattern. The 'rumor' that PED might greatly reduce pork supplies was an important factor in the elevated prices. But the 'fact' that PED was not a major disruptor of supplies has now allowed prices to return to more realistic levels," Hurt says. "What do 'more realistic' hog prices mean for the remainder of this year and 2015? PED is still having an impact and is still killing some baby pigs. However, markets are treating PED as something that can be managed unlike last spring and summer when the 'rumor' mill was creating grave uncertainty for pork supplies. Pork supplies are expected to be down 1% in December-January-February, and then increase by 3% in the spring and 5% in the summer."

So, despite continued tight supplies and persistent strong consumer demand, profits will be lower in 2015, Hurt says. That shouldn't be too much of a surprise, though, considering the year saw record profits. With supplies expected to remain on the low side, watch feed costs in the next year. Though they'll likely stay low, they'll be part of an overall equation that will yield profits possibly as much as $20 a head lower than 2014 in general.

"The most profitable year on record will be 2014, with estimated profits near $55 per head. Those will remain strong for the first three quarters in 2015, averaging around $44 per head, before tailing off to around $10 per head in the final quarter. Profits for the entire year of 2015 are still expected to be $36 per head which would be the third-highest profit year of the last 26 years dating back to 1990," Hurt says. "High hog prices and lower costs are the keys to current profitability. Estimated annual costs of production have dropped from a high of $67 per live hundredweight in the drought year of 2012 to $56.50 for this calendar year and to $52 anticipated for 2015. Notably, corn prices declined sharply in the fall of 2013, but meal prices did not decline overall until the fall of 2014. So, 2015 will be the first calendar year when both corn prices and meal prices have moderated, dropping feed costs to five-year lows."

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