Hog Market Staying Afloat Despite Lower PEDv Losses -- Economist
As the hog industry's epicenter shifts to Des Moines, Iowa, with the convening of the 2014 World Pork Expo, new information shows earlier estimates of death loss -- and corresponding herd cuts -- stemming from the porcine epidemic diarrhea virus (PEDV) may have been overplayed, resulting in a potential slide in hog prices moving into summer, one expert says.
"Speculation that the PED virus had greatly reduced pig numbers took lean hog futures prices to astounding heights. Now, markets have a better understanding that while the PED virus certainly did its damage, death loss may have been overanticipated in February and March, and that producers have been able to compensate for a substantial portion of lost animals by much higher weights," says Purdue University Extension ag economist and hog market analyst Chris Hurt. "There are still critical question surrounding the disease that have to be answered. The first is, what were baby pig death losses from January through March that will determine July through September slaughter supplies? And second, will the impacts of PEDv or a related virus return next winter?"
March USDA data showed hog farmers made up for cuts in herd inventory by bumping up slaughter weights; after slaughter numbers fell by almost 6% in the last few months, farmers have responded by upping slaughter weights by just shy of 5% above year-ago levels. "Clearly, weights are substantially compensating for lower animal numbers," Hurt says.
In the first five months of this year, overall hog numbers are down 4%, weights are up 3%, so pork inventory is just 1% below earlier expectations. If these trends continue, sharply higher hog prices likely won't be part of the summer, Hurt says. Other trends heading into fall could keep a lid on later price gains.
"While there is always some questioning of USDA counts, the reasonable accuracy of the March report provides some added confidence in their numbers headed into the summer. That report suggested the number of pigs available for market in June, July, and August would be down about 4%. Assuming that weights continue to be 3% to 4% higher, this implies pork supplies for the summer will be unchanged to down 1% relative to the summer of 2013. Such prospects are hardly a ringing endorsement for super high prices of hogs," Hurt says. "Fall hog supplies will be drawn from the spring farrowings, where USDA reported producers' intentions were up 2%. Assuming a 1% drop in the number of pigs per litter with some continued PEDv impact and 2% higher weights, this implies that the fall pork supply will be up 2% to 3%."
There is still a lot of domestic consumer demand for pork, and that will likely keep the floor from falling out from under the industry, even with signs that herd expansion is underway - namely in the form of lower sow slaughter. So, though the spikes may not be as sharp, the hog sector should still stay in the black moving forward if herd expansion doesn't surge ahead too far ahead of the demand side.
"The pork industry is in the midst of record profits in the second and third quarter of this year with profits for those not strongly impacted by PEDv over $70 per head on average for the six-month period. Those profits are expected to decrease in the final quarter of 2014 to about $40 per head. Prospects for the first three quarters of 2015 also appear positive with estimated profits at about $20 on average. Sharp declines in soybean meal prices this fall are expected to be an important contributor to lower costs. However, with a continued buildup of the breeding herd and reduced impacts from PEDv next winter, hog prices could drop back to levels that are closer to breakeven by late 2015 and into 2016," Hurt says. "The horror of heavy death losses from PEDv was emotionally difficult for any producer to experience. The industry is now experiencing some positive economic benefits of that disease. The biggest concern for the industry now is a potential overexpansion of 2015 pork supplies. That excess expansion could be based on too large of a breeding herd expansion followed by a winter with limited damage from PEDv and a big surge in 2015 poultry supplies as well."