Aug 23, 2014
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From the Editor

RSS By: Brian Grete, Pro Farmer

Pro Farmer Editor Brian Grete takes time to talk with Pro Farmer Members about some of the key issues in each week's Pro Farmer newsletter.

PEDV goes viral

Mar 07, 2014

Hello Pro Farmer Members!

Porcine epidemic diarrhea virus (PEDV), the coronavirus that can be deadly for piglets but poses no food safety threat, is sending shock waves through the hog industry -- and the hog market. As the number of confirmed cases increases, death loss totals are on the rise. But no one in the industry seemingly has a good handle on how many pigs are being lost to PEDV aside from knowing it’s a quickly upward moving target.

To date, the top 10 U.S. pork production states account for 3,536 (86%) of the confirmed U.S. cases. These are reported cases. There are undoubtedly others that have gone unreported or have not had samples tested. But concern with the disease is possibly rising even faster than reported cases or death loss totals.

As the number of confirmed PEDV cases has risen, fear in the marketplace of declining hog production has escalated, causing hog futures to surge to an all-time high. Concern is greatest in spring- and summer-month contracts as hog production seasonally declines through the second quarter of the year and typically bottoms between mid-June and August. Currently, the April through August futures contracts are trading well above the $100.00 level -- an area that has been hard to pierce in the past and even harder to maintain trade above. As the week concluded, June hogs were above $120.00, an unthinkable level for many in the hog industry. And the market is showing no signs of topping.

With reports that two East Coast (presumably North Carolina) pork plants will reduce kill schedules by one day to four due to a lack of hogs, impacts from PEDV are also having a greater impact on the cash market. If this spreads into the Midwest, it would become much more attention-grabbing. My biggest concern on the rally has been that the cash market hasn't been keeping pace with the surge in futures. Because lean hog futures are settled against the cash market, a wide premium is a concern -- not now, but it is when futures are nearing expiration. A slowdown in hog slaughter may be a sign packers are done chasing cash hogs. And that's not bullish.

With hog futures surging, the easy thing to do is sit back and let the market go. After all, it’s usually not wise to step in front of a runaway bull market. But it’s also not advisable to get more bullish as prices rise. It’s important to keep risk management in mind.

The question is, how do you lock in or protect record prices? A hedge can be established with a short futures position, though that leaves you vulnerable to margin calls. A safer way may be to buy put options, which limits your risk to the premium you pay for the puts, while locking in a profitable price. But rising prices bring increased volatility, which drives up premiums. Or you could sell call options above the market, which could mean eventually being exercised into a short position at a predetermined price that’s attractive to you, but this doesn't lock in a price. All of these strategies have their risks and rewards. Picking the one that best fits your hog operation is the key.

Remember, what goes up, always comes down... sometimes at an even faster clip. Don't forget about risk management.

That's it for now...

... have a great weekend!

Follow me on Twitter at @BGrete

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