AT the midyear mark, July will begin to reveal the true impact porcine epidemic diarrhea virus (PEDV) is having on U.S. pork production — a year after the virus was first detected in the U.S.
The reports of PEDV cases surged in February and March. Hogs born in those months will start coming to market in July. The soon-to-be-seen drop-off in slaughter totals due to PEDV losses could be 3-10%, depending on the analyst, Ryan Turner, risk management consultant for FCStone LLC, told the Dairy Outlook Conference.
He added that the U.S. Department of Agriculture estimated the weekly hog slaughter rate to fall to 1.8-1.9 million head, which is a 2-3% reduction, while Rabobank projected a weekly total of 1.5-1.6 million head, which is closer to a 10% reduction (Figure 1).
Therefore, starting in July, all market participants — from producers to traders — will be closely watching weekly slaughter totals, which should provide an important piece to the PEDV puzzle and drive the future direction of the hog market.
Pork producers, motivated by lower feed costs, are feeding market hogs to heavier carcass weights. The average carcass weight reported by USDA in May was 287 lb., 11 lb. heavier than a year ago.
"There are some in the industry that think heavier carcass weights alone will mute the impacts of PEDV as we go into July and August," Turner said.
However, the upcoming hot temperatures will make it difficult to increase gains on market hogs. However, Turner explained that hog producers should be able to maintain 7-8 lb. gains through the summer.
After newly set highs peaked in March, hog prices have since corrected. The anxiety over supply has resurfaced as hog market prices traded upward in the last couple of weeks.
Lean hog futures and pork cutout values are expected to rise in July and August before leveling off for the remainder of the year, Turner explained.
Still, Turner told Feedstuffs that it will be challenging to make hog market predictions in the upcoming months until the effect of PEDV losses to weekly slaughter is exposed. Watching the cash market will be key because it trades in real time every day.
Going forward, the length of time it takes for a drastic decline in production to occur will control the market's direction. For every week that passes without a substantial reduction in production, lean hog futures will start to erode. If production slips, though, then the cash market will climb to match the futures market, which already has figured in the anticipated losses, Turner explained.
Pork demand is holding its own despite the fact that PEDV's bearing on supplies is driving retail prices higher. Total year-to-date U.S. pork exports are pegged at 776,601 metric tons with a value of $2.25 billion. Each month, the U.S. exports an average of 20-25% of its total pork production.
USDA reported reduced cold storage for all pork, except bellies. In particular, ham stocks are at all-time lows. With the spike in ham prices due to demand from Mexico and Russia, the market is nervous about ham supplies.
Overall, hog producers should be seeing black ink. Iowa State University estimated farrow-to-finish returns at a profit of $74.13 per head in May (Figure 2). Although the May profit margin was lower than the previous two months, it was still well above prices at the start of 2014.
Furthermore, for those lucky hog operations that have not had to endure PEDV, profit margins in the second and third quarters are anticipated to be north of $70 per head, which is record-breaking. However, the fourth-quarter profit margin is expected to drop to $40 per head and keep going lower into 2015 to $20 per head, according to Purdue University economist Chris Hurt.
He added that as hog operations continue to expand breeding herds and the impact of PEDV lessens, hog prices should level off by late 2015 and early 2016.