H5N2's Murky Market Impacts

Fri. Apr 17, 2015 11:40 AM

By Katie Micik
DTN Markets Editor

OMAHA (DTN) -- It's a bad time to be a turkey, especially in Minnesota, the country's top turkey-producing state.

Barely a day in April has gone by without a new case of H5N2 avian influenza virus. More than 2 million birds, primarily turkeys, in eight states have died or have been culled due to the outbreak.

The outbreak's prognosis is unclear. USDA specialists can't predict how many farms or how many birds will eventually be involved. They don't know if the illness will quiet down this summer, or if it will return next fall as the wild birds suspected of spreading the virus migrate again.

The market impact is also murky. More than 30 countries have some type of ban on imports of U.S. poultry. USDA recently slashed its poultry export forecast by 6%, leading to concern that increased domestic supplies could pressure prices in the meat case. And then there's the question of corn: Just how much do turkeys eat, exactly?

On average, U.S. turkey production is around 235 million birds, said DTN Analyst Rick Kment, and turkey production is running 3% to 5% ahead of last year's production levels.

"So even a 2 million (bird) loss -- which does significantly impact local production -- may not have a significant impact to the overall market," he said. "I think the concern is not what has already happened, but what will be seen through the next several weeks and months."

Jim Sumner, president of the U.S Poultry and Egg Export Council, told DTN the bird losses are costly to the companies involved, but since only a small percentage of the turkey flock has been affected, the H5N2 influenza outbreak is unlikely to produce a national turkey supply problem.

While most of the bans on U.S. poultry imports are specific to the states or counties where the virus has been identified, China, South Korea and South Africa have banned all U.S. poultry outright, he said.

This means a complete halt to chicken feet exports, all of which go to China. The council has also been working to expand turkey exports to China, which have now been cut off. And South Korea requires the U.S. to be free of highly pathogenic avian influenza for six months before it reopens imports. That could be a problem depending on how the outbreak progresses, he said.

Sumner said the export situation could have been a lot worse. In the mid-1990s, more than 60% of exports went to China and Russia. "We have become much less dependent on those countries over the years," Sumner said. "So we won't be in as drastic of a situation as we could have been."

BACK-OF-THE-NAPKIN CORN ESTIMATES

Ed Usset, a grain marketing specialist at the University of Minnesota, said turkeys eat about 2 pounds of feed for every pound of meat they gain. Corn typically makes up 55% to 60% of the average turkey ration.

He figures about 850,000 bushels of corn would go into producing 1.4 million turkeys, the latest official estimate of Minnesota's losses, using an average bird weight. That's not much considering Minnesota produced a 1.2-billion-bushel corn crop last year.

"That's a tricky number because the turkeys that were killed had eaten half of that already," he said. "We're sort of making the assumption that we're taking that many turkeys out of a full production cycle, but we really didn't do that. It's tough to put your finger on it."

The bigger issue in estimating lost feed demand is production cycles, Usset said. Turkeys are fed to a variety of weights, making feed consumption calculations difficult.

"If you're producing 12- to 14-pound turkey hens -- the type you and I might buy for a nice Thanksgiving meal -- they only take eight to 10 weeks to produce. The barns clear out and they start again. But if you're producing the heavy toms that get up around 40 pounds, that takes more time. That's 30 weeks."

Dr. T.J. Myers, an associate deputy administrator with APHIS' veterinary services, said once an infected flock has been culled, USDA cleans and disinfects the barn, but it's not allowed to be repopulated until disease surveillance in the area is complete. On average, that takes a couple of months, he said.

Usset said he thinks that's the more important number to watch. "It's not birds that have been lost, but how long are these barns or facilities out of production? Two months? Three months? There's a big difference."

DTN Senior Analyst Darin Newsom said the bird flu effect hasn't shown up in corn basis or futures spreads, but it could eventually cause a ripple.

"Corn might not be able to tolerate much of a disruption in feed demand with exports already running behind pace," he said. Some analysts see 2014-15 ending stocks climbing back to 2 billion bushels. Newsom said that's not impossible, but noted the turnaround in poultry is faster than in cattle or hogs. "After the required quarantine period, flocks could start to grow again."

BEEF COULD FEEL THE HEAT THIS GRILLING SEASON

DTN Livestock Analyst John Harrington said it's tough to tease out the immediate impact of H5N2 on the livestock markets, but he thinks the threat of prolonged sanctions against U.S. poultry exports is contributing to the bearishness of the deferred live cattle futures.

In the latest supply and demand report, USDA left domestic per-capita consumption of turkey unchanged, but increased broiler per-capita consumption from 87.2 pounds to 88.3 pounds, up 1.2 pounds from the month prior and 5 pounds more than in 2014.

"The biggest enemy of expensive beef cuts in the second quarter is the abundance (real or perceived) of cheap chicken and pork," Harrington said. "I doubt if actual production problems will be significant, rather the perception is probably the bigger factor and potential market impact. The more the international community has reason to fear our chicken imports, the easier it will be for market bears to imagine domestic meat supplies flooded by bird meat once destined for export demand but now looking for a new home."

Katie Micik can be reached at katie.micik@dtn.com

Follow Katie Micik on Twitter @KatieMDTN

(AG/CZ)

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