Have Market Participants Correctly Gauged PEDV Magnitude?

Have Market Participants Correctly Gauged PEDV Magnitude?

Economist says markets will evaluate several factors to determine trajectory of hog values

As Porcine Epidemic Diarrhea virus sweeps through U.S. hog facilities, the market is trying to estimate just how big of a dent the disease will have in the hog herd.

According to a Purdue University Extension economist, no one knows exactly how large losses will be, but lean-hog futures market participants seem to have decided that they will affect slaughter supplies this spring and summer.

In the past two weeks, says economist Chris Hurt, April lean-hog futures have risen by $10.68 and June futures have risen by $6.10 to record highs.

But, have market participants over-anticipated the magnitude of losses due to the PED virus?

Economist says markets anticipate hog slaughter supplies will be down 7-10% on PEDV

"So far this year, the number of animals coming to market has been very close to the number indicated by the USDA December Hogs and Pigs Report," Hurt explains in a recent Farmdoc post. "When adjusted for the number of slaughter days compared to last year, the slaughter count so far is down about 0.5%.

"However, market weights have been higher by about 2.5%, resulting in total pork production being up about 2%. Year-to-date hog prices have been close to those in the same period in 2013," he says.

Related: PEDv Hitting Record Levels in Missouri

Hurt adds that the lean-hog futures market has extremely high price expectations for the March through July period this year, apparently due to expectations of small slaughter supplies on PEDv losses.

Projected lean-hog prices for that period, using futures closes on Feb. 28, suggest expected prices averaging near $105 per hundredweight, compared to $86 for the same period one year ago.

If low supplies are thought to be the cause, this is suggesting that market participants believe that hog slaughter supplies could be down 7% to 10% during this time period. This also assumes that other factors, such as low beef supplies, are also factored in.

Estimations from the USDA December inventory count
Hurt said that second quarter 2014 supplies will come primarily from the under 50-pound pig count on Dec. 1, which was down about 0.5%. Thus market participants may be anticipating that many of those very young pigs, which were in inventory on Dec. 1, ultimately died due to PEDv.

"Third-quarter 2014 supplies will be drawn heavily from winter farrowings, and this is where numbers get very uncertain," Hurt said. "Winter farrowing intentions were up 1.3%, but because PEDv kills baby pigs, the number of pigs weaned per litter could be down sharply.  This is what no one knows for sure. One helpful reading from the USDA inventory survey was the number of pigs weaned per litter during the fall 2014 farrowing. That was about 2% lower than the trend weaning rate.

"The impact of PEDv is thought to intensify in cold weather so the loss of baby pigs could be higher than 2% during the period of November 2013 to March 2014," Hurt said.

Related: Take Educated Approach to Limiting PEDV Spread

Again, no one knows the impact on a national basis, but if the actual lean-hog futures impact is closer to 3% to 4%, rather than 7% to 10%, then futures prices may ultimately have to adjust lower.

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Great uncertainty continues for the size of the spring pig crop, he says. Farrowing intentions were also up somewhat over 1%, although the impact on death losses from PEDv are expected to moderate as weather warms.

"All great uncertainties eventually get resolved in the marketplace. For the hog market, this will occur as we see the actual number of slaughter hogs coming to market from March through July this year," he says.

Broad-scale impacts
The bigger question is how PEDv will impact the economic returns for the entire pork industry in 2014, but Hurt's initial answer may be somewhat surprising – he notes that overall, economic returns may increase.

"The demand for pork is relatively inelastic, and this means that when there are short supplies, consumers are slow to adjust consumption downward," Hurt explained. "As a result, prices will tend to increase by at least 2% for each 1% that the quantity of pork drops. This means that total revenue in the industry will likely increase due to PEDv and more than offset the losses from the disease."

Related: PED Vaccine Takes Aim at Deadly Virus

Hurt added that the outcomes of individual producers will likely vary as higher revenues are compared to the financial losses due to death loss; producers with average or small death losses may be better off, while those with severe losses will probably suffer a net financial loss.

"At the farm level, current futures markets are suggesting a live price for 2014 at a record high of $73 per hundredweight compared to $64 last year," Hurt said. "This will provide record-high industry revenues and the highest profit per head since 2005."

Source: University of Illinois

TAGS: Farm Life
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