April 7, 2014

As the reported cases of porcine epidemic diarrhoea (PED) have now spread to 27 states since it was first identified in May 2013, a growing pork shortage threatens American tradition, according to several sources.

Since the beginning of the year, prices for April pork deliveries have increased by more than 45%. China has temporarily closed its borders to American pork products, fearing the spread of the disease to local hog farms, according to Gantdaily.com. At Friday's (Apr 4) closing, pork futures contracts dropped US$0.02 to US$1.23 per pound, but that still inflates the price of pork by almost 50% in less than one year.

The American tradition of summer barbecues with racks of pork ribs smoking over open fires across the country may not be in that much danger, because other reports are indicating that lower corn prices and negative price pressure are mitigating the epidemic's effect on the projected pork shortage. Negative price pressure is what happens when the price of a product exceeds the consumer's comfort level for the cost of the product. When that happens, consumers stop buying that product, and buy something else instead. In addition, China's decision to ban imports of American pork products has actually helped to ease price pressure in the American market, while creating more of a pork shortage for Chinese consumers.

The US sends more than 100 million hogs to market each year, with 113 million hogs going to market in 2012, the most recent year on record, making the US the second biggest pork producer after China. More than seven million pigs have been affected by the epidemic, according to the Allendale market research company. By that measuring stick, pork prices should not have increased by more than 6.2%, since that the percentage of affected pigs to total pork production.

China prefers to import live hogs from the US, largely due to the Chinese prejudice in favour of fresh meat over frozen pork products, making the ban against US pork products more sensible. Banning US pork products will hurt Chinese consumers because Chinese domestic pork prices are substantially higher than prices for imported American pork. In July of 2013, for example, China pork was running at around US$1.15 per pound when American pork was just US$0.78 a pound. Current US pork prices have increased significantly over the past nine months, but they are still lower than current prices on domestic Chinese pork.

The virus that causes the PED does not affect humans, but it causes adult pigs to lose weight due to diarrhoea and vomiting. The disease is, however, fatal to piglets, which means that there will be a further bump in pork prices when those dead piglets do not come to market.

US pork producers are predicting a 10-15% decrease in pork production over the next four months, but that doesn't explain the recent 45% price increase. Unwarranted fears about restricted supplies have driven futures up beyond normal levels, creating a demand market that encouraged the early liquidation of some stocks, driving actual deliverables to lower price points.

According to reports, the current US hog herd holds just under 63 million head, well above analysts' expectations of just 61.5 million animals. The gestation period for hogs is around 114 days, so that a largely female herd (the males are usually sent to slaughter while the females are routinely kept for breeding purposes) can reproduce itself three times in the course of a year. Pigs generally produce 10-12 piglets per litter, and piglets reach maturity in seven months.

Investors seeking quick profits from a pork shortage would be wise to tiptoe around this market until the smoke clears from the barbecues of the nation.  Backyard grillers may be burning more chicken than hog for a few weeks but then chicken was the original white meat, and chicken stocks are more easily adjusted than pork stocks due to the short gestation period….but the pork shortage threatens an American tradition only to the extent that backyard chefs refuse to convert to chicken, beef, lamb or, for that matter, shrimp.