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Expansion Will Trim Hog Profits in 2015

The 2014 edition of the Pork Powerhouses report shows U.S. and Canadian hog producers are riding high on record profits due in large part to herd cuts stemming from the devastating porcine epidemic diarrhea virus (PEDv).

Despite record hog prices -- and resulting record consumer pork prices -- there's a lot of demand, and that's got some signaling an increase in production in the next year. With questions swirling about PEDv's true impact on the hog sector, there's reason to exercise some caution in ramping up production too much in the next 12 months or so, considering what such regrowth could mean to current out-of-this-world profits.

"The rising volume of pork production over the next year will stand on three legs: lower death losses from PED, higher farrowings from producer expansion, and higher market weights this fall and winter. How can pork producers produce more pork quickly? The answer is that the PED virus was not as deadly this summer as anticipated," says Purdue University Extension ag economist and livestock expert Chris Hurt. "More baby pigs survived this summer than expected, and that will help boost pork supplies by the end of the year and into the winter. The number of pigs per litter this past summer was down 1.6% from the previous summer. This is much smaller than the losses in the previous two quarters. The number of pigs per litter was down 5.5% in the winter of 2014 and down 5.1% in the spring quarter."

The actual influence of PEDv on the North American hog herd isn't easy to nail down: Combining the timing of when the disease first entered the industry's lexicon (as far back as October of last year) and when the disease was finally better controlled, its actual death loss may have been exaggerated early on, Hurt says.

"It is important to keep in mind that PED began to be observed in the national data in October of 2013. Estimated death losses, measured as the number of pigs per litter below trend, was about 2% to 3% in October and November of 2013. This rose to 6% to 8% in the winter months and then 4% to 6% in the spring of 2014. The critical point is that the number of pigs per litter may actually be above year-previous levels beginning late this fall," he says. "Increasing pigs per litter will be based on the low levels from a year ago and, of course, on the perceived 'improved management' of the disease this fall and winter. It is clear that PED is not controlled, but the hope is that spread of the disease and the number of death losses can be lowered. There are a host of reasons the industry believes they have 'improved management' of PED including: two vaccines approved for use, better understanding of methods of transmission, and better biosecurity on farms. A milder winter could also contribute. By winter, this 'improved management' could result in increasing pigs per litter by 2% to as much as 4% over the same measures of a year ago."

This all means that it's critical that the industry' doesn't race at breakneck speed to expand to make up for PEDv-derived losses. Demand remains high, and because of the inherent nature of the hog industry to be slower to adjust to market prices than in the grain sector, production will likely remain at profitable levels and herd populations through at least winter, Hurt says. That's true for both pig-per-litter numbers and market weights. Overall, he expects total supplies to remain lower until winter, when they will rise slightly. By next summer, total supplies will likely be 5% higher than current levels.

All in all, this means the $80-plus-per-head profits of the last few months are likely out the window, falling to closer to $30 a head for calendar 2015, Hurt says, based mostly on increases in production. So, will this mean much to the embattled grain sector in the coming months?

"Will pork production grow enough to really help corn and soybean meal consumption for the 2014/15 marketing year? The answer is that only about 2% more pork will be produced in the 2014/15 corn and soybean marketing year. However, nearly 4% more pork is expected for the 2015 calendar year," Hurt says. "The point is that it takes time to build the animal base and that more than one-half of the marketing year will be over before market hog numbers really begin to rise in the spring of 2015. However, grain farmers can be confident that the feed usage base will continue to build for the 2015/16 marketing year."

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