Friday's USDA Hogs and Pigs Report certainly looks bearish. All major categories, except December-February pigs per litter came in higher than trade expectations.
From producer surveys, USDA estimated the December-February pig crop at 27.318 million, down 2.8% from a year earlier. On average traders expected the report to show the pig crop down 3.6%, with a range from down 9.2% to up 1.4%. Normally a smaller than expected drop in the pig crop would be perceived as bearish to prices.
However, the unusually wide range of pre-report guesses indicates considerable disagreement among analysts as to the actual magnitude of death losses due to porcine epidemic diarrhea virus.
Trade chatter hints that some analysts were trying to guess what numbers USDA would report. Those guesses may have been different than what they really believed was going on in the industry.
Suppose the trade had been pricing in a 7% drop in the pig crop into the market. A pig crop anywhere between down 3.6% and down 7% would be perceived as bearish on the surface. But the pig crop would have to be down more than 7% to actually be bearish.
Futures price action this week reflects the uncertainty. A Rabobank research report released Tuesday predicted baby pig losses due to PEDV will trim 2014 pork production by 6% to 7% this year. That rattled hog traders, contributing to a $3 daily limit futures plunge. A 6% to 7% production cut would be smaller than some traders had been factoring into the market. But that's still a larger cut that average trade guesses in advance of the report.
Wednesday and Thursday hogs surged back from Tuesday's hit. Volatility suggests traders are on edge because they have yet to zero in on winter PEDV losses and therefore summer slaughter and therefore how to price hogs.
Current price advances may not be sustainable. Summer hog futures advanced 30% since January. Spillover demand from pricy beef is supporting hog prices. Still, speculation that baby pig death losses in the December-February pig crop due to PEDV will significantly cut May-July slaughter hog marketings is a key market driver.
The Chicago Mercantile two-day lean hog index advanced from a low of $79.91 on Jan. 20 to $129.05 on March 27--a 61% surge. That advance will be hard to maintain even if PEDV losses slash summer hog slaughter significantly more than the normal seasonal decline.
PEDV losses did surge during November and December as winter set in. Number of samples that tested positive for PEDV continued to escalate through winter. Questions about actual losses will persist until hogs born in the winter begin to come to the slaughter market.
Depth of summer marketing hole remains unknown. The first PEDV cases were reported in May and June. Actual death losses then were also hard to pin down. However, pigs born in May and June normally come to market in late autumn and early winter. That's typically the highest hog slaughter time of the year.
A market hog slaughter shortfall of a given magnitude going into the seasonally highest slaughter period of the year creates a much looser supply-demand squeeze than the same slaughter shortfall going into the seasonally tightest slaughter stretch of the year would cause.
For months, traders have been trying to guess how deep the June-August hole in marketings will be.
Report does not answer all questions. PEDV made how USDA counts pigs a hot topic at USDA's data users meeting in Chicago last fall.
"Depending how individual producers fill out the survey, the extent of the death losses may not be completely reflected in the pig crop number," explains Steve Meyer, Paragon Economics, Adel, Iowa. "One way to account for the death loss is to compute it as a residual of the inventory numbers at the start and the end of the period (Dec. 1 and March 1), the pig crop, barrow and gilt slaughter and imported supplies. In the last report, USDA did show a decline in the number of pigs saved per litter, but that number was smaller than expected. However, the calculated death loss number was significantly higher than in previous quarters, providing some sense of the impact of the disease."
Another approach is to tally live pigs weaned.
The December-February pig crop did come in higher, than the average of trade estimates. But how producers calculate the pig crop still leaves a lot of leeway in what actual death losses have been.
Breeding herd expansion. The March 1 breeding herd inventory and March-May farrowing intentions and June-August farrowing intentions all came in larger than trade guesses in advance of the report.
That says pork producers are responding to high hog prices and solid profits by gearing up production.