Margins look good heading into 2015

Margins look good heading into 2015

Although 2014 has been a profitable year for producers, continued weakness in the hog and other protein markets has taken a toll on forward margins over the last few weeks. Not only is there a seasonal tendency for prices to fall after Thanksgiving, but this year we are facing a strengthening dollar which looks to limit exports in 2015.

In the near term we’ve seen the seasonal tendency for a decline in pork cutout and cash hogs this year with increased pig numbers and continued large weights. We’re holding carcass weights around 215 pounds and harvested just over 2.25 million head the week ending Dec. 13.

Longer term I believe falling oil prices could impact protein demand as many developing countries have revenues dependent on the sale of oil. On top of this we’ve seen the Russian currency devalue considerably due to the same problem and this appears to be affecting the futures markets. Even though U.S. pork is currently banned from Russia they have historically been a large importer of all proteins, and given their consumers may not be able to afford as much protein going forward this could put downward pressure on proteins globally.

Even with these current market issues, hogs remain profitable and 2015 margins look to be better than 2014 for many producers. The key reason for this is that the average producer hedged prior to the high of the market and that same average producer was likely affected by porcine epidemic diarrhea virus (PEDV). Many producers chose to lock in a good portion of 2015 margins prior to the current downward trend and those locked-in margins are set up to be better than those realized in 2014.

As far as PEDV is concerned, the swine health monitoring project, ran by the University of Minnesota, continues to show PEDV cases below year-ago levels in those sow units associated with the project. The other health factor is of course porcine reproductive and respiratory syndrome (PRRS) which appears to be at least on the same track as last year and one wonders if, given the lower instances last year, could we see more cases this winter?

Other recent developments include avian influenza in Canada and reports that some wild birds have tested positive in Washington state along with the possibility of the Cuban market reopening. This news moved the market somewhat on Dec. 17-18 and it will be interesting to see if we can keep avian influenza out of U.S. flocks. I think the big risk would be if an already tenuous Mexican relationship could result in a block of poultry exports to Mexico quicker than what might happen normally. These types of events are the reason why risk management is so vital. Let’s hope it’s a non-issue going forward.

Margins remain strong historically in the hog sector and 2015 will likely be another historically profitable year. It’s clear that volatility remains and sometimes seems to be the only constant. I think we’ve repeated this many times in our columns, but working capital will be king going forward and maintaining that liquidity will be important to your business. In planning any expansion or investments in your business in 2015 be sure to work on structuring your financing to help maintain as much liquidity as possible. This will not only help manage the volatility in the markets but give you the ability to manage through any potential losses in the future.

It is amazing what one year’s time can bring. I looked back to a similar column I wrote in December 2013 and the theme was on the impact of PEDV and how the average producer broke even for 2013. At that time we were already looking at historically strong projected margins for 2014 but no one could have predicted just how wild that ride would end up being. I believe producers need to remain diligent in targeting what returns are acceptable to their operations because this kind of volatility can go both ways. We in the pork industry have seen it in the past and are seeing it take place in the grain industry this year.

Good times are here for now, and this Holiday Season should be a happy one indeed for those in the pork industry.

Roelofs has worked in the hog industry his entire career and has been with AgStar Financial Services since 2008. For more insights from Roelofs and the AgStar Swine Team, including their weekly video Hog Blog, visit AgStar.com. If you’d like more information on AgStar’s Margin Manager Tool check it out at AgStar.com/MarginManager.

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