2014 in rearview mirror, pork producers look to capitalize in ’15

2014 in rearview mirror, pork producers look to capitalize in ’15

Hog prices have softened considerably in the past two months as slaughter numbers continue to climb. Prices paid for pigs have declined from over $100 per cwt. in October. They declined to $88.50 per cwt. in November, $85.65 in December and under $80 in early January.

With corn and meal prices higher today than after harvest, margins were compressed to $20 - $25 per head in early January. While most producers wish they had more coverage on, my sense is that overall, coverage is fairly broad through April or June. April futures have hit new contract lows at $77.50. This is still over breakeven, but not with much margin for the average.

There are several drivers impacting the market in addition to seasonal forces. Foremost, porcine epidemic diarrhea virus (PEDV) incidence is much less than a year ago. It also is considerably less than the marketplace expected based on the best information available. While it is questionable if that will last through the season, it appears that the biosecurity employed or the immunity levels maintained are holding the level of new outbreaks down.

Another driver is falling pork exports. This is the result of three factors, including higher priced pork through much of 2014. Other factors are Russian imports displacing significant volumes of European pork and a stronger U.S. dollar making U.S. pork more expensive to the global marketplace. Pork exports (excluding pork variety meats) were off by nearly 18% in November. However, those sales would have been negotiated in September and October when prices were still quite high.

The final driver is the expectation of expansion based on the Hogs and Pigs report from December. With continued growth expected, pork buyers will work down inventories going into larger supplies and wait to commit on some purchases. This will push markets lower.

The positive side is that domestic demand is still strong. Short beef supplies have led to pork products being featured more regularly. Due to the cost difference between the two and better retail margins for pork, this should continue. Product prices in November were 8% higher than the prior year and 17% higher than in November 2012.

Monthly average retail value calculations from the U.S. Department of Agriculture Economic Research Service indicate the increase in pork prices from a retail perspective:

Overall, 2014 has been a year for the record books. Many producers had the most positive financial year ever in spite of perhaps one of the worst production years. Working capital and owner equity were dramatically improved during the year. This positioned many producers for investment, growth or simply building cash reserves. Many clients have continued on a consistent course of protecting profits in the future. While they missed some of the extreme highs in the market last year, they are well positioned to capitalize and outperform in 2015. 

Kent has more than 30 years of experience in the swine industry and serves as the swine team leader for AgStar Financial Services. For more insights from Kent and the AgStar Swine Team, including their weekly video Hog Blog, visit AgStaredge.com.

TAGS: Marketing
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