To say it has been a tough week in the pork business would be a monumental understatement. And the pain is worse when it is completely undeserved.

I really don’t know how to express how badly I feel for pork producers today. After seeing last year’s record-high hog prices yield no profits due to ethanol-driven feed prices, you must now cope with a pork demand crisis caused by a virus whose only tie to your animals is a bit of ancient genetic material and, unfortunately, a name. It isn’t right. It isn’t fair. But such is life at times. I’m so sorry this has happened to you but it is time to cinch it up a bit tighter and get back to work. The sun will shine again. And these will still be the wonderful animals we have always enjoyed.

First, let’s assess the demand situation:

• It is too early to determine if US consumers have actually reduced pork purchases. We think that has happened to some degree, but we don’t know how much. We do know that wholesale demand has softened this week with packers reporting that retail orders have declined. That doesn’t necessarily mean consumers aren’t buying, however. Retailers are likely waiting as long as they can to order product, concerned about consumer buying behavior. Plus, this is a golden opportunity for them to buy at lower prices, so why would they be in any hurry? It is likely they are hand-to-mouth on pork purchases regardless of what consumers are doing. I would be if I was in their shoes.
  
  
• Russia and China have banned imports from some US states, but those countries were buying hardly any pork this year anyway. Further, China has a back door entry point in Hong Kong, which has not blocked imports from the United States. So, while the bans have gotten a lot of press coverage, I don’t see them being economically important except in the case of pork variety meats to China. About 75 per cent of the pork variety meats going to China/Hong Kong this year have moved through Hong Kong. The back door is still open.
  
  
• The most serious and “real” demand problem is in Mexico. Mexico has not banned imports, but pork sales there have plunged due to both fear of “swine flu” and the general shutdown of the Mexican economy to control the virus. Shipments to Mexico accounted for about 4 per cent of US production in January and February, the last months for which data are available. Putting that amount of product back on the US market would push wholesale prices down by 5-7 per cent, given historic demand elasticities. Even here, there is a caveat: Many packing plants in Mexico are shut down at present and that may create some short-term demand for US product.

Industry groups report some success in getting the virus “rebranded” in the press. The World Health Organization’s edict to call the virus “H1N1 Influenza A” is a shot in the arm for that effort. In addition, Gannett, which owns several hundred US newspapers, including USA Today, announced that its reporters would use the new WHO moniker. Both the National Pork Producers Council and the National Pork Board have been very complimentary of government personnel for their support of changing the name and assuring US consumers that pork is, in fact, safe.

And finally there is the helpful issue that the vast majority of people who have contracted the virus have seen mild symptoms and a quick recovery. Add all of these up and we see a few stories asking “What’s the big deal?” and “Was this overblown?” The answer is probably “yes,” but in all fairness, we did not know that back on Monday or Tuesday and the fact remains that flu pandemics, such as the one seen in 1918, killed millions of people. There was reason for concern.

Markets Take Hard Knocks

Hog markets have definitely been impacted. Figure 1 shows that negotiated purchase prices have fallen by $5.94/cwt. from Friday, 24 April through Thursday, 30 April. Swine/pork market formula prices have fallen by $3.88/cwt., largely because many of these formulas include multiple-day averages. Prices for hogs based on other market formulas, primarily Chicago Mercantile Exchange (CME) futures-based prices, are virtually unchanged from last week because they were determined several months ago when the delivery contracts were signed. Other purchase agreement prices generally move with feed prices, so the $1.93/cwt. decline there had little to do with hog markets.

The larger damage was done to CME Lean Hogs futures. That should be no surprise since that market tends to react more to news and emotions than do cash markets, which are pretty soundly based on supply and demand at a given point in time. The big loser was the May contract which has fallen $10.90 from 24 April through 30 April.

But a huge portion of that decline was a basis correction that was going to happen one way or another. I and many others had expected a cash hog price rally to take care of the wide May basis. But the demand uncertainty associated with H1N1 influenza A has, for the time being, put the kibosh on any cash rally and forced the basis correction back upon May futures. The Friday-through-Thursday declines in June, July and August futures were $4.90, $3.75 and $2.88/cwt., carcass, respectively. Not zero, but not nearly $10.90 either. And those three contracts are up $1.73, $1.65 and $1.18/cwt., respectively, as I write this on Friday morning.

So, is this a big deal? Yes. Is it fair? Absolutely not. Could it reverse itself? I think there is a good chance of that if: a) the swine flu moniker goes away, b) the disease spread slows, c) US cases remain generally mild and, perhaps most important, d) the virus is not found in pigs. That last point has been the bedrock of the “don’t-blame-us” and “our-product-is-safe” statements. If it should go away, the demand restoration job gets much, much tougher.