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PEDV crushes hog sector hopes for expansion

PEDV crushes hog sector hopes for expansion
After six months, market finally has confirmation that PEDV death losses "are real," and a significant shortage of market hogs is ahead.

TEN years ago, it was the "cow that stole Christmas" that disrupted an industry flying high and poised for growth, and this year, it was a porcine virus sapping the productive potential of the nation's sow farms that provided the proverbial lump of coal in the industry's stocking.

It took two quarters to really show the market that something was amiss, but the U.S. Department of Agriculture's December "Hogs & Pigs" report proved that porcine epidemic diarrhea virus (PEDV) has indeed put a damper on any hopes of growing the hog supply in 2014. The total inventory of all hogs and pigs in the U.S. as of Dec. 1, 2013, was down 1%, and in a big shock to the market, the number of breeding hogs fell 1.3% (Table).

Given that PEDV is a disease marked by death loss among young pigs through weaning age, the market had been waiting for confirmation that PEDV was, indeed, having a marked effect on the number of pigs saved per litter. Last week's report did just that, with the November litter rate marking the first time in more than four years that the litter rate was smaller than the same month a year ago (Figure 1).

"The implication is that PEDV death losses are real," Farm Progress analyst John Otte said. "A hog slaughter squeeze is coming in the May-June period."

The monthly trend illustrates Otte's point. The litter rate, which had been increasing on a more or less monthly basis, has now decreased for three consecutive months:

* Pigs per litter in August was 10.38 versus 10.12 in August 2012;

* Pigs per litter in September was 10.28 versus 10.13 in September 2012;

* Pigs per litter in October was 10.17, steady with 2012, and

* Pigs per litter in November was 10.04, down from 10.16 in November 2012.

Economists Steve Meyer and Len Steiner noted in the "Daily Livestock Report" that the quarterly growth in litter size is the smallest in 10 years and a "sharp departure" from the growth rates seen in recent quarters.

The result was fairly consistent with what the market had been expecting, unlike with the previous quarter's report, which puzzled analysts by showing significant productivity growth despite the disease.

By mid-December, PEDV had been confirmed on more than 1,645 swine premises in 20 states, according to testing data from the National Animal Health Laboratory Network. While the testing data are somewhat convoluted because they do not distinguish multiple tests from a single premises, potentially "double counting" some affected locations, the reality is that the number of confirmed premises is likely growing and is apt to keep a lid on productivity growth for the foreseeable future.

While the farrowing data did not surprise the market, the market was somewhat shocked to find that the nation's breeding herd was smaller than a year ago, coming in at 4.757 million head. Analysts had expected growth of as much as 1%.

"The decline in the breeding herd tells us that despite strong incentives to expand, producers so far have failed to do so," Meyer and Steiner wrote. "In fact, the breeding herd numbers have been retreating."

They called the development "puzzling" and questioned why farmers might not be retaining more productive sows, giving PEDV's effect on gilt retention and an overall shortage of market hogs as possible explanations.

Further complicating the reading of the tea leaves, producers reported farrowing intentions for the December-to-February quarter that were 1.3% larger than last year, with projected farrowings for March through May up 1.4%.

Farrowing intentions suggest that producers expect to squeeze more pigs out of fewer sows, but the aforementioned developments in the litter rate seem to fly in the face of those expectations.

"Low feed costs and the promise of profits will likely encourage producers to maximize farrowings, but the initial farrowing estimates may be too optimistic," Meyer and Steiner explained. "With pigs per litter growth flat, this implies limited growth in the pig crop in the coming quarters."

The pig crop already reversed course on the increasing numbers seen during 2012 (Figure 2).

Cheap feed and fewer hogs in the pipeline likely point to heavier slaughter weights and fewer head slaughtered, they concluded.

Based on the report data and on Canadian hog import trends, University of Missouri economist Ron Plain said slaughter numbers are almost certainly going to be smaller in 2014, and prices are almost certainly heading higher.

Plain projected slaughter to fall roughly 1.1% compared with year-ago numbers in both the first and second quarters of 2014, with third-quarter slaughter more or less steady with 2013. That smaller supply should push Iowa/Minnesota carcass hog prices up to $84/cwt. in the first quarter and $94/cwt. in the second quarter before prices settle into the low $90 range in the third quarter of the year.

With expansion now clearly off the table, the situation is much different from what the industry might have anticipated otherwise given these market fundamentals.

Producers were looking forward to an extended period of solid prices underpinned by solid demand, and those pricing incentives would have allowed for modest expansion and some capacity rebuilding.

Instead, sow producers are left to sort out how they can mitigate the ravages of PEDV — something the industry is working diligently to get a handle on, and great progress has been made in a fairly short period of time — and feeders will have to make do with higher prices and better feeding margins.

In other words, it's not necessarily the end of the world, but pork producers' opportunity to siphon off some market share from the beef industry will be much more difficult now than might have been anticipated.



Market recap

Much of the quarterly USDA data were priced into the market prior to the report's Dec. 27 release, and the market reaction was fairly muted. Two holiday-shortened trading weeks in a row also kept reaction somewhat in check, although the market did enjoy a post-New Year rally, closing last Thursday at the highest price for the spot contract in more than seven weeks.

Otte said the rally in the futures market was due, in part, to a spillover lift from buying across the CME livestock complex, although traders are certainly aware of the looming supply shortfall.

He speculated that the bottom in the cash market may have been set, even though cash prices continued to hover near $77/cwt. on a weighted-average carcass basis at week's end.

Of concern to the market, the carcass cutout is now off nearly $5/cwt. from levels seen prior to the holidays, with ham and belly prices falling sharply over the past two weeks.

Ham prices, which typically decline after the Thanksgiving/Christmas buying spree, fell below $70/cwt. for the first time in months, and belly prices are hanging just above $100/cwt.

With relatively soft cutouts and a major shortage of hogs coming in the not-so-distant future, packers have been reluctant to bid too aggressively for hogs.

Packer margins were estimated to be between $4 and $8 per head last week, and companies are none too eager to bid themselves back into the red.

If Plain's price projections come anywhere close to reality, in a few months, packers may not have much choice in the matter.


Hogs and pigs report (Dec. 1), million head





% year before

All hogs and pigs





Breeding herd





Marketing herd





Groups in marketing herd

Under 50 lb.





50-119 lb.





120-179 lb.





180 lb.-plus





Sept.-Nov. period






Pigs per litter





Pig crop





Farrowing intentions











Source: USDA.

PEDV crushes hog sector hopes for expansion

Volume:86 Issue:01

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