Hog prices and profits for prairie producers are shooting off the charts.
Is this sustainable or a top?
Hog market analysts are debating that, and it won’t be answered until the U.S. Department of Agriculture issues its March 28 Hogs and Pigs Report.
“It’s nuts,” Hams Marketing’s Tyler Fulton said about the hog price rally.
“I can’t remember the last time I sat there for 10 minutes waiting for the market to open because there is so much hingeing on it, there’s so much psychology worked into it.”
The Chicago Mercantile Exchange’s lean hogs futures have surged $25 per hundredweight since mid-February, rising to $130 for the June contract as of March 17.
The price spike breaches the upside limit of a range that had held since the start of 2011, when $105 was the market high.
Porcine epidemic diarrhea virus (PED), which is reducing the North American hog slaughter population, is driving the rally.
“It’s exclusively PED,” said Fulton.
Weekly slaughter estimates averaged six percent below year-before levels for two weeks, suggesting PED is significantly cutting U.S. hog production.
“It came out of nowhere,” said Fulton about the slaughter estimates.
“Prior to that, we were pretty much bang on year-before numbers.”
It’s a major change to the outlook if PED has reduced slaughter hogs by six percent. Analysts had grown accustomed to seeing little PED impact in estimates and reports, regardless of news that hundreds of farms were being infected in an ever-widening area, recently including Eastern and Western Canada.
The two most recent weeks of slaughter declines suggests PED is finally having an impact.
“The market is no longer speculating and trying to guess where these things are going to be,” said Fulton.
“They’re now just figuring in this as a certainty.”
It’s still not clear why PED and the likely death of four million piglets had not affected the market much before now.
Some analysts say it is also not certain that the recent lower hog kill numbers are proof that the herd itself is smaller than expected. A brief period of decline could be explained by the impact of the cold winter. Also, year-before totals were probably higher than they would have been without last year’s much higher grain prices.
All eyes will be on the quarterly USDA Hogs and Pigs Report for the most comprehensive estimate of the true size of the U.S. herd and the real impact of PED.
Fulton said Canadian farmers are in a sweet spot, making relatively more money than U.S. producers in this rally because of the decline of the Canadian dollar.
The last rally, sparked by the 2012 U.S. Midwest drought, coincided with a much higher Canadian dollar, so the impact was less than south of the border.
This time, prairie farmers are getting all the benefits of the futures price surge.
“You could say it’s perfectly transferable into Canadian dollars,” said Fulton.
“We’re getting all of it.”
The shortage of pigs to kill in the United States has some U.S. packers thinking about opening their doors once more to Canadian-origin pigs, but Fulton said he doubts many will go that way because Canadian packers are also short and chasing pigs.
“There’s no market rationale to move south,” said Fulton.
Hog profitability is high for farms that don’t get hit by PED.
Iowa State University estimates that Iowa farmers made $33.59 per pig in February, which is the highest since 1979. It estimates the cost of production at $56.30 per hundredweight, which continues a 13 month trend of cost declines.
Futures now give farmers a chance to lock in exceptionally profitable prices all through the summer, including August, with no sub-$124 per cwt. prices between May and August.
December 2014 to May 2015 prices range from $84 to $88 per cwt.
Fulton said the present run-up in prices is not unjustified if recent slaughter numbers truly represent a smaller hog herd. However, the issue will be how high prices can go before driving away buyers if the USDA verifies the smaller herd.
“How high will prices have to go before the available supply is actually rationed?”
This situation has not occurred for many years, he added, so it’s anyone’s guess.
“It’s a long time since we’ve had to tackle this question.”