As the end of 2013 approaches, most pork producers are glad to see a new year coming. At AgStar, we monitor a financial database which includes a large portion of AgStar’s portfolio with producers across the country and nearly one million sows' worth of production. The data shows that the average producer will not see much in the form of positive earnings for 2013. With the drought creating high feed prices and large positive basis on corn for much of the year, it’s not hard to tell why. On top of that, there were negative basis issues early in 2013 on lean hogs and we’ve cycled back to large historical negative basis on hogs today.
Cash prices in mid-December were running around $75-76/cwt, with February lean hog futures around $85-87/cwt. Cutout remains in the $90’s definitely giving packers an incentive to run more hogs through the system. We’ve seen that happen in mid-December, with total numbers harvested finally surpassing the previous year. That, combined with heavier weights, means there’s a lot of pork out there. It will be interesting to see how long we can hold the larger total harvest numbers when one would expect a shortage because of porcine epidemic diarrhea virus (PEDV).
Everyone has likely had their fill of PEDV talk this year, but it gives us another reason to look forward to next year and, assuming you don’t break, its helps make 2014 look profitable. Thosewho can manage around—or are prepared to manage through—PEDV and porcine reproductive and respiratory syndrome (PRRS) in the best fashion will stand to have a tremendous 2014. It appears that those who are prepared ahead of time to act immediately upon the break of PEDV can greatly reduce the piglet death loss incurred and therefore mitigate the financial impact on their operation. Are you prepared to act within hours of a break?
On a much more positive note, 12-month forward margins rebounded to historical highs during the latter half of 2013. We continue to see clients capture those opportunities, but when looking beyond the pigs already on the ground, the mentality has shifted some, due to PEDV and the uncertainty around whether they will truly have the hogs to sell. We’ve seen more use of options farther out and producers capping their level of coverage, for pigs not on the ground, at levels they are comfortable with.
At the end of the day, 2013 has been a trying year for producers from both a marketing standpoint and a production standpoint due to the introduction of PEDV. Even those who have remained disciplined on risk management and may have made money in 2013 had to ride the rollercoaster of the markets and fund massive margin calls early in the 4th quarter. The challenge going forward will be managing through this and capturing the projected profitability in 2014. It will be welcomed by many!
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