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Pork: USDA reports help brighten outlook

Published July 7, 2014

URBANA, Ill. – According to Purdue University Extension economist Chris Hurt, pork producers might want to say thank you for the recent USDA reports that have sharply brightened their profit outlook. The June 27 Hogs and Pigs report indicated that breeding herd expansion had not yet started and that baby pig death losses from the PED virus continued to be high last spring. The second report of beneficial numbers came in the June 30 Grain Stocks and Acreage reports, which were contributors to rapidly falling corn and soybean meal prices.

“In the week following the reports, higher anticipated hog prices and lower anticipated feed prices have increased profitability prospects about $18 per head for the period that represents use of the 2014 crops,” Hurt said. “Lean hog futures rose on average about $6 per hundredweight and corn prices fell by about 40 cents per bushel with soybean meal declining around $30 per ton.

“Prior to the hog inventory report, there was an expectation that the nation’s breeding herd was already in expansion, with spring farrowing intentions up 2 percent,” Hurt continued. “However, on June 1, the breeding herd was down fractionally and actual spring farrowings were also down modestly. The PED virus apparently continued to inflict higher death losses in the spring than had been anticipated. While USDA does not specifically ask producers to report death losses from PEDv, they do report the number of pigs per litter. By comparing the reported number of pigs per litter this year to the five-year trend provides a proxy of how PEDv has affected baby pig survival.”

Hurt said that this analysis suggests that baby pig death losses began to show up in the national data last October, with 2 percent losses. That expanded to 3 percent in November, 6 percent in December, and peaked near 8 percent death losses in the coldest weather months of January, February, and March. Losses appeared to be moderating somewhat with warmer weather, but were still 7 percent in April and 5 percent in May. The death losses from PEDv will likely continue to trend lower this summer, but current information suggests that the disease is far from controlled.

“The number of hogs coming to market this fall and winter will be smaller than had been expected due to smaller spring farrowings and higher-than-expected PEDv death losses,” Hurt said. “This is the basis for the sharply higher lean hog futures this fall and winter. Producers have been selling their surviving hogs at higher weights. The number of hogs marketed in the first half of 2014 was down about 4 percent, but weights were up over 3 percent. As a result, pork supplies were surprisingly down less than 1 percent as weights substantially compensated for PEDv death losses. This means that high hog prices are being partially driven by smaller pork supplies, but more important by strong pork demand. The two most important components of strong pork demand are related to the currently tiny supply of beef and to strong pork export demand.

“Record-high retail beef prices have some consumers looking around the meat case for alternatives,” Hurt added. “In May, USDA estimated the average grocery store price of beef cuts to be $5.91 per pound. The average cut of pork on the other hand was $4.10 per pound. Even though this was also a record pork price, it was $1.81 per pound lower than beef. This large price difference seems to be causing a number of consumers to shift toward pork.  Foreign consumers have been strong competitors for limited world supplies of pork as well. Losses from PEDv have been highly publicized since February and this has seemingly contributed to aggressive foreign buying of pork in an attempt to avoid the summer pork shortages resulting from peak baby pig death losses last winter.”

Hurt said that as a result, hog prices in the first half of 2014 averaged a record of about $80 per hundredweight on a live basis. This was nearly 25 percent higher than in the same period the previous year. The full impact of smaller pork supplies will be felt this summer with new record-high hog and pork prices. Live hog prices are expected to average in the mid $90s in the third quarter before moderating in September and moving down to the mid-to-higher $70s for the final quarter of 2014.

“Producer profits were record high in the second quarter this year, near $70 per head,” Hurt said. “Continued record hog prices and now lower feed prices mean that record will fall this summer as third quarter profits are expected to be over $100 per head. These extremely high profits are clear signals for producers to increase pork production. The USDA report did reveal that producers have received this signal and they intend to increase farrowings by 4 percent this fall. If they start the expansion, and if PEDv is better controlled, pork supplies can begin to grow by the spring of 2015, and could total 4 to 6 percent higher in the last three quarters of 2015.

“No relief for consumers is expected this summer as retail pork prices keep moving up to new records,” Hurt concluded. “Retail pork prices are expected to level off in the fall and then move somewhat lower into the winter. More relief from record-high retail pork prices can be expected in the second half of 2015 as pork supplies build.”