The spread of Porcine Epidemic Diarrhea Virus (PEDV) disease accelerated sharply when winter weather hit the U.S. last fall, with the number of reported cases seemingly peaking in mid-winter. The following chart illustrates the spread of the disease and the cumulative number of cases recorded since the initial reports were posted last April.
PEDV doesn’t greatly affect older hogs, giving them a case of diarrhea from which they recover from within a week. However, it’s deadly for weanling piglets. Indeed, swine industry sources now estimate the U.S. has lost 4-8 million pigs due to the disease since the spring 2013 outbreak.
The loss of those animals as market hogs obviously holds major implications for the outlook for spring and summer of 2014 and beyond.
The hog and pork industry is now anticipating a substantial reduction in the number of hogs coming to market during the weeks and months ahead. Indeed, traders now obviously believe the USDA was not aggressive enough when it revised its swine population totals downward on its December 2013 Hogs & Pigs report.
Actually, a major portion of those revisions were made to the June 2013 totals, when the PEDV outbreak was still in its infancy. Moreover, the implicit short-term supply forecasts made by the report were reasonably accurate.
For example, the report stated the number of pigs weighing 50 pounds or more, which would likely be marketed during winter, as being essentially unchanged from year-ago. December-February slaughter data topped the comparable year-prior result just 0.15% over the comparable year-ago figure.
The following chart of weekly slaughter rates illustrates the comparability of those numbers, but it also shows the sharp reduction experienced since early March. The implied plunge in supplies played a major role in the recent price spike. Readers should also observe the seasonal fluctuations in hog kills, particularly the comparative size of recent totals and those historically seen during late spring and early summer.
Keep those in mind during the following discussion.
The December Hogs & Pigs report also stated the number of piglets weighing less than 50 pounds at 99% of the late-2012 total, thereby implying a similar decline in spring 2014 hog supplies. Remember that the animals in question were generally born last fall, when the PEDV outbreak was still somewhat limited in scope, so the modest supply reduction didn’t seem misplaced until late February.
The latest industry reports now suggest March kills could fall 5%-7% short of the comparable 2013 results. Indeed, one prominent industry analyst has publicly suggested summer numbers could fall 10% or more below last year.
Cash hog prices reflected little industry alarm about the outlook late last year or in early 2014. For example, the CME lean hog index dipped to a fresh fourth-quarter low at 79.23 cents/pound on Christmas Eve, rose modestly through the holiday season, then dipped back to 79.91 on January 20.
Moreover, the usual early-winter rise only carried it up to 85.62 by February 13. However, the market has subsequently rocketed higher, with daily quote for the CME lean hog index topping the $120.00/pound level on March 21. The following chart illustrates those shifts and places them within the context of the past few years.
Although the chart doesn’t explicitly indicate it, these latest quotes have smashed all former records for hog prices. The former peak, at 107.84 cents/pound, was reached in August 2011. Major Chinese buying greatly exaggerated active domestic wholesale demand at a time when grocers were gearing up for planned Labor Day features. Pork production has obviously fallen dramatically lately. For example, the USDA estimates the total for the week ended March 15 at 431.2 million pounds; that represented a stunning 5.4% annual reduction. However, when compared to the total posted when the market posted its August 2011 high, it topped that figure by 6.6%.
Ultimately, this strongly suggests further processors and grocery industry buyers have been panicked into trying to get a head start on their anticipated summer needs by the prospect of substantial spring-summer production cuts stemming from the PEDV outbreak. Given the widespread belief that hog and pork prices will hit record highs this summer, trying to get ahead of the game in the first quarter makes considerable sense. On the other hand, pushing cash hog and pork prices drastically higher at this point seems less rational given the larger numbers usually available at this time of year.
Late March quotes for spring and summer CME futures are anticipating a mid-2014 price spike to the 128.00-130.00 cent range. That seems justified if summer hog supplies fall 5%-10% below year-ago rates. However, having spot prices leaping above the 120-cent level in early March and pricing April futures (which expire April 14) above 125 cents/pound, appear to be an overreaction to those forecasts. As a consequence, a pullback of some sort seems likely sometime this spring.
We would also warn that by forcing a market spike at this time and quite possibly supporting prices at stunningly high levels through early spring, the industry could stifle the traditional demand surge that occurs during the grilling season. That could limit the market’s upside potential this summer and open the door to a dramatic breakdown at some point down the road.