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Putting H1N1 Flu in Perspective, Detailing the Economic Impact

The apparent slowdown in the spread of the H1N1 influenza A virus has allowed U.S. officials to put the situation into perspective

The apparent slowdown in the spread of the H1N1 influenza A virus has allowed U.S. officials to put the situation into perspective.

So far the novel flu virus has reportedly been responsible for 48 deaths in Mexico, where it started, and just two deaths in the United States.

That compares with the normal seasonal flu which sickens hundreds of thousands of U.S. citizens and kills over 35,000 annually.

Officials are starting to believe that extraordinary measures such as school closings may have little or no effect on the spread of the virus, which appears now to be no more severe than the typical seasonal flu.

The brunt of the fallout from the flu scare has fallen on pork producers.

The National Pork Board, using data compiled by Paragon Economics, and with assistance from USDA’s Agricultural Marketing Service, summarizes the economic impact on the industry as follows:

--Average negotiated purchase prices fell by $6.74/cwt. carcass from April 24 through May 2, which translates into a per-head-per-day loss of $13.64.

--The impact on the average price paid for all market hogs has been less but still significant. The average price for all purchases declined by $3.40/cwt. carcass from April 24 through May 1, meaning the average value of all hogs purchased during that time period fell by $6.78/head.

--Reduced sales value was about $6.9 million for April 24-May 1.

--The average cost of production is estimated at $139.45/head. Based on an average price of $121.76 on May 2, this results in a loss of $17.69/head. Using a daily harvest averaging 410,000, producers are losing $7.2 million/day at the price levels of May 1.

--Average forecasted revenue through 2009, assuming 200 lb. carcass weight and historical Iowa-Minnesota basis levels, is $124.38/head using May 2 closing Lean Hog futures prices.

--With May 2 closing corn and soybean meal prices, and using Iowa State University’s Estimated Costs and Returns Series, the average producer will lose $13.26/head for the remainder of 2009.

--A 1,500-sow producer who produces 30,000 market hogs/year will lose $397,800 over the next 12 months based on May 2 hog, corn and soybean meal futures prices.

--These losses follow an average loss of $23.11/head since September 2007, based on national total net weighted average hog prices, national average carcass weights and ISU estimates of farrow-to-finish production costs.

--The losses from the H1N1 flu scare come at a very bad time for pork producers. Since September 2007, producers have effectively lost 50% of the equity they accumulated since 1990. Lenders report that many producers are near the end of their working capital, and these latest losses could mean a number of operations will be closed.

The H1N1 virus’ impact to the futures market:

--Average price of Lean Hogs futures contracts through April 2010 at the close on April 24, prior to the H1N1 virus announcement, was $69.13/cwt. carcass. The average futures market price at the close on May 2 was $65.71. The decline means that the potential value of hogs sold through April 2010 has dropped by $6.84/head.

--With 116 million hogs sold annually, if hog prices remain lower by the amount of April 24 through May 2 declines in Lean Hogs futures, producers would lose another $793.44 million in equity over the next 12 months.