H1N1 Economic Impact May 4, 2009

Price and Value Impact since April 24:

Sources:  Paragon Economics, Inc. using data from USDA Agricultural Marketing Service, Reports LM-HG-200, LM-HG-201 and SJ-LS-710.

1. The impact of the H1N1 flu has been quite severe on spot hog prices – ie. prices negotiated each day.  Average negotiated purchase prices fell by $6.74/cwt carcass from Friday, April 24 through Friday, May 2.  That translates to a per-head value loss of $13.64 for the animals whose price is negotiated each day.
2. The  impact on the average price paid for all market hogs, including those prices on formula contracts, contracts tied to futures markets and contracts tied to feed costs has been less but is still significant.  The average price for all purchases declined by $3.40/cwt carcass from April 24 through May 1, meaning the average value of all hogs purchased during that time period fell by $6.78 per head.
3. Multiplying each day’s per-head value decline for all purchases by each day’s slaughter reveals that producers saw a reduced sales value of approximately $6.9 million dollars relative to the animals’ value on April 24 during the week that ended May 2.
4. The average cost of production at present is estimated to be $139.45 per head.  At the average price and revenue of $121.76 on Friday, May 2, this results in a loss of$17.69  per head.  With daily harvest at 410,000 head, producers are losing, approximately $7.2 million per day at the price levels of Friday, May 1.
5. Current forecasted average revenue through 2009, assuming average carcass weight of 200 lbs. and historical Iowa-Minnesota basis levels, is $124.38 based on May 2 closing Lean Hogs futures prices.
6. Based on May 2 closing corn and soybean meal prices and the production parameters of Iowa State University’s Estimated Costs and Returns series, the average producer will lose $13.26 per head for the remainder of 2009. That translates to an average loss of $27.7 million per week for the U.S. swine industry for the remainder of 2009. 
7. A producer with 1,500 sows and 30,000 head of annual production will lose $397,800 over the next 12 months based on May 2 hog, corn and soybean meal futures prices.   
8. These losses follow an average of $23.11 per head loss since September 2007 based on national total net weighted average hog prices, national average carcass weights and ISU estimates of farrow-to-finish production costs.
9. This price declines come at a very bad time for pork producers.   Since September 2007, producers have lost roughly 50% of the profits they have accumulated (ie. analogous to owner equity) since January, 1990.   Lenders report that many producers are near the limit of their working capital and these latest losses will mean operations will be closed.

H1N1  Virus  Impact to the Futures Markets

1. Average price of Lean Hogs futures contracts through April 2010 at the close on Friday, April 24, prior to the H1N1 virus announcement was $69.13 per carcass hundredweight.  The average futures market price at close of May 2 was $65.71.  The decline means that the potential value of hogs sold through April 2010 has declined by $6.84 per head.
2. Based on 116 million hogs sold annually, if hog prices remain lower by the amount of the April 24 through May 2 decline in Lean Hogs futures, producers would lose an additional $793.44 million in equity over the next 12 months.

Information provided by the  National Pork Board.
http://www.pork.org/