After a few weeks of continued market increases in the hog industry, the only topic on everyone’s mind is how high can these markets go? Looking back just two months, we have seen margins for the next 12 months improve by over $35 per head on what were already historically high margins. Back when this opportunity was presented, most producers took advantage and locked in some very good profits for 2014. However, since that time, porcine epidemic diarrhea virus (PEDV) has changed the hog world as we knew it, and I know many individuals have been second guessing their decisions and are trying to manage their business accordingly.
With this historic run-up in hog margins, producers have also experienced margin calls that rival the spending of the Federal Government.In talking to producers, I can only share in the anguish they have endured in making another margin call for a limit-up move.However, my message to them has never wavered. Aside from trying to limit margin calls from moving to an option strategy, or using a three-way strategy to give back some opportunity, your best move would be to see the positions through to intended maturities.As a lender, we need to make certain we understand each producer’s positions along with their strategies going forward. This may take a joint conference call with their marketing consultants to fully understand each operation’s risk profile.However, not funding a sound risk management strategy is not an alternative.
With PEDV being the driving force behind the market surge it appears, in a market like this, there is no limit to the upside potential. What a person has to remember, as fast as PEDV changed the industry, we are only a vaccine or foreign animal disease away from the market taking an immediate turn. I was talking to a client of mine recently who made the comment that as a lender to the swine industry we will see record growth and pay-down in the same year.He may very well be right!
Rethinking Market Strategies
Most producers we work with have a written marketing plan.One can only expect to revisit those plans and have discussions on the validity of their plan with an event like PEDV. The overwhelming discussion I have been having with producers is implementation of that plan going forward without taking into account market fundamentals and adapting to the risk of not having production, which could be gone overnight with a PEDV break. Selling hogs to the deferred contracts never raised much concern from producers or lenders alike.However, having experienced $100-plus weaned pig purchases is causing individuals to reconsider alternatives to having high levels of coverage going forward.This reality may leave some very good opportunities on the table, but aside from knowing you will never break with PEDV, is this a risk you are willing to take?
Only in 1998 and 2008 have I seen stress levels this high for producers.They are concerned about PEDV, and then they have to wonder about daily margin calls and what impact that could have on their operations. Is this the new norm? If so, do we need even more liquidity for operations within the U.S.? Without fully understanding the long-term impacts of PEDV, we are only speculating.
What’s Ahead: Hog Margins & Margin Opportunity
Current hog margin crush is projected at $68 per head for the next 12 months.This level of profitability is something I thought I would never see, and may be hard to realize if you have adjusted your marketing plan.As for the numbers, weights continue to rise at record levels. I fully expect this to continue until August, unless we continue to see the contract converge with October.The numbers to watch will be weights and hog slaughter numbers.Slaughter numbers have started to drop and are currently 93% of last year’s number.This number will continue to drop through June and I would expect it to drop again in August based on the timing of PEDV breaks. I believe we have surpassed 50% of the sows being affected with PEDV in the U.S. The interesting part to watch will be how this industry adapts quickly to change and adversity. I expect producers will continue to increase weights, increase breeding levels and lower stocking densities in finishing barns to maximize gain and efficiency. The U.S. pork producer will meet this challenge and be ready for whatever comes along next.
Steve has over 16 years of experience with AgStar Financial Services.For more insights from Steve and the AgStar Swine Team, including their weekly video Hog Blog, visit AgStar.com. If you’d like more information on AgStar’s Margin Manager Tool check it out at AgStar.com/MarginManager.
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