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Waning Flu Scare Deepens Financial Woes

It appears that the H1N1 influenza scare is dissipating, but not before it has wreaked havoc in pork and hog markets, and left pork producers and packers in an even deeper financial bind. The damage has been significant, especially when piled on top of what has happened over the past 18 months.

Figure 1 shows price and value changes from Friday, April 24, the first day of the H1N1 influenza news, through Wednesday, May 6. The impact, of course, is heaviest in the market for pigs priced through negotiated trades. That price bottomed (hopefully!) on Tuesday at $50.84/cwt. carcass, $10.24 lower than on April 24. That decline took nearly $22 off the value of each pig sold through negotiated trades.

The impact on all producers has been less since a minority of pigs are sold through negotiated trades, and prices determined in other manners are not as sensitive as negotiated prices. The “All Purchases” section of Figure 1 shows the weighted average price of all producer-sold pigs on the dates shown. These include swine/pork market formulas, which tend to move with the negotiated prices, but lag them by a couple of days due to multi-day averages used in many contracts. They also include other market formulas, which are almost exclusively tied to Chicago Mercantile Exchange (CME) lean hogs futures, and other purchase arrangements which are largely comprised of cost-plus contracts. Prices from these two methods do not move with negotiated prices. These prices have fallen by $7.59/cwt. carcass.

When multiplied by daily slaughter from April 24 through May 6, the total impact of this price decline was nearly $13 million. And that loss in revenue would be on top of losses that were already being suffered by pork producers on April 24.

Packers Experience Less Orders
Packers reported a significant slowdown in orders from retailers the week beginning April 27. That slowdown continued last week and packers, in turn, slowed chain speeds and announced reductions for this week.

Polling by the National Pork Board indicated that consumer confidence remained high – but it is almost a certainty that purchases indeed slowed. And retailers can hardly be blamed for holding off on purchases in order to avoid being caught with large inventories in case consumer demand was damaged severely.

Think of the pork chain as a string of cars travelling at speed with consumers leading the way. Consumers tapped the brakes and retailers, next in line, slammed on the brakes. Daily slaughter totals have indeed slowed – but they normally do so this time of year.

Figure 2 shows data for this year and last and it appears this year’s decline has indeed been overdone. Getting back to speed will not be immediate – but I have had reports this week of packers pursuing pigs more aggressively. The afternoon national negotiated price on Thursday was $53.14/cwt. carcass, $1.87/cwt. higher than on Wednesday. The sell-off in CME Lean Hogs Futures continued through Tuesday but appears to have ended. All contracts rallied on Wednesday before a mixed day on Thursday.

The most severe total decline was in the nearby May futures contract (Figure 3). As I explained last week, that price had to get closer to cash, but I and many others thought cash would come to the futures, not vice versa. The flu scare caused the opposite to occur. Only the December contract has regained its pre-flu levels, with the June through October contracts (Figure 4) ending Thursday $3 to $5 lower than on April 24.

Quick Recovery Still Possible
I still think there is a good chance of a quick recovery. Slaughter hog supplies are getting tighter as was expected. Russia has announced it will drop its ban on pork imports from the United States. China’s ban remains but Hong Kong remains open, so U.S. product could still reach that market. Other markets that still have bans in place account for very little U.S. pork export volume.

Two keys remain: U.S. consumer demand returning to pre-flu levels and Mexico’s market recovering from a reported decline in pork purchases of up to 80%. The first is, it appears, happening. The second will happen eventually, but the speed of that recovery depends on the relative importance of the two apparent reasons for the decline.

Those reasons are consumer fear of pork due to the “swine flu” name and the general slowdown of the Mexican economy to control flu’s spread. The first depends on the success of pork sellers in Mexico getting the “pork is safe” message out there. That may take awhile. The second factor should rectify itself quickly as travel and general activity levels return to normal. Mexico was buying 4% of total U.S. production in January and February and accounted for 41% of U.S. pork variety meat exports in those two months. It is a crucial market for total hog value in the United States.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]