As I write this month’s Financial Preview, lean hog futures are up over a $1.00 for nearly every month traded. This is nothing new, as we have set contract highs many times since the first of the year. Two key drivers of pork prices have converged, impacting the market for pork. The supply issue has become a growing concern, but also an opportunity.
Pork production will likely be adjusted downward from the most recent United States Department of Agriculture Foreign Ag Service estimates. Those estimates, made two months ago, indicated pork production would increase by 2.6% in this year. Given recent information on the continued spread of porcine epidemic diarrhea virus (PEDV), it seems unlikely to me that we will have any increase at all in U.S. pork production. It is antidotal, but estimates of >40% of the U.S. breeding herd affected seems realistic, which should equate to 5.5-6.0 million pigs less sent to slaughter plants in the calendar year.
We may be able to make up the majority of that with heavier weights,assuming we have a cooler summer and pigs can continue to grow well, but it seems unlikely we can or will make them 6% larger on average. That would require nearly a 220-pound average carcass weight for the year, which is possible, but probably not likely.
The other significant factor is demand. Domestic pork demand has been strong in the last half of 2013 with record retail prices for pork. Much of the demand strength is due to lower beef production in 2013 (down 1.25%). Expectations for 2014 (down 5.85%) indicate that strong demand will continue.
Lower beef supplies, with growing global demand is driving beef prices higher, benefiting pork and poultry meat demand and prices. Broiler demand should be very strong in the coming year, and will most likely benefit even more than pork, as consumers look for lower cost protein sources to replace less available, more expensive beef.
Production and Hedging
The returns to pork production should make this one of the best years in history. At the same time, the battles with PEDV and some porcine reproductive and respiratory syndrome (PRRS) outbreaks will make it a very challenging year as well. The unprecedented futures prices and less than break-even margins from October through January, have made managing a hedging strategy more difficult. Additionally, many producers were margining hedge accounts at levels never seen before. Also, with the onset of PEDV, hedging unborn pigs becomes more risky should the markets continue to move higher and disease hits the farm. Producers need to evaluate the risks associated with a PEDV break and how many farms would likely be affected. In operations with a single farrowing site, it is very difficult to hedge unborn pigs without adding risk to the farm instead of taking risk off the table. If those pigs are lost for 30 days, and the spread of PEDV continues to expand, finding replacement pigs will be difficult, or at least very costly. Lifting those hedges may also be costly.
In operations where there are multiple farms that may be independent of each other as far as feed sources, transportation, and other support functions, the risk may be quite different.
This business has never been easy and never will be. We are fortunate to work with many great business leaders who tackle the challenges on a regular basis and have a track record of emerging stronger than ever.
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