Uncertainty surrounding total swine herd losses to porcine epidemic diarrhea virus (PED virus) has sent lean hog futures for spring and summer contracts to record-high levels, but it's possible the markets have overreacted, said Chris Hurt, Purdue Extension agricultural economist.
PED virus is a virus of swine that is fatal to nearly 100 percent of infected piglets that are less than two weeks old. There is no vaccination or treatment for the disease, which poses no threat to human health or food safety.
While PED virus can be devastating to individual swine herds, Hurt said it remains to be seen whether slaughter supplies will fall enough to warrant the $10 to $14 per-hundredweight surge in spring and summer futures prices over the past two weeks.
"So far this year the number of animals coming to market has been very close to the numbers indicated in the U.S. Department of Agriculture's December Hogs and Pigs report," he wrote in a weekly outlook report. "When adjusted for the number of slaughter days compared to last year, the slaughter count so far is down 0.5 percent. However, market weights have been higher by about 2.5 percent, thus causing total pork production to be up by about 2 percent."
According to Hurt, the futures market suggests that lean hog prices could average about $112 per hundredweight for the period of March through August. This compares with an average of $88 per hundredweight for the same time period last year.
If fear of low slaughter supply is the cause of the price jump, Hurt said it means traders expect hog slaughter supplies could be down by as much as 7-10 percent.
When compared with USDA's December inventory count, those numbers indicate that slaughter supplies for the second quarter of 2014 will be down only 0.5 percent. Third-quarter supplies will come primarily from winter farrowings, which is where the most uncertainty comes into play.
"Winter farrowing intentions were up 1.3 percent, but since (PED virus) kills baby pigs and is most prevalent in cold months, the number of pigs weaned per litter could be down sharply," Hurt said. "This is where no one knows for sure."
The USDA will provide an updated inventory report on March 28, which will provide information on the number of pigs that survived the winter.
If lean hog slaughter supplies end up dropping by only 3-4 percent instead of the larger losses markets might be expecting futures prices could come down.
The bigger question, Hurt said, is how PED virus will affect the financial well-being of the pork industry as a whole this year.
"The initial answer might be somewhat surprising," he said. "(PED virus) will likely increase economic returns for the U.S. industry."
Demand for pork tends to hold fairly steady, and consumers are slow to reduce their pork use even in short supply situations. According to Hurt, hog prices tend to increase by at least 2 percent for every 1 percent that the quantity drops.
"This means that total revenue in the industry will likely increase due to (PED virus) and more than offset the losses from the disease," he said.
The outcome for individual hog producers won't necessarily mirror that of the overall industry. Producers with herds severely affected by PED virus with more piglet deaths than the national average, could end up with net financial losses, Hurt said. High hog prices could offset pig losses for producers with an average number of piglet deaths.
"PED virus could actually be a financial windfall for producers who are able to avoid the disease," he said. "At the farm level, current futures markets are suggesting a live price for 2014 at a record high of $76 per hundredweight compared with $64 last year. This will provide record-high industry revenues and the highest profit per head since 2005."