Tuesday, July 16, 2013

Record pork supply seen as U.S. farms profit again

By Elizabeth Campbell

U.S. hog farmers are making money for the first time in a year after prices surged to a two-decade seasonal high and feed costs fell, spurring them to expand herds that will yield the most pork on record.

About 5.882 million sows were withheld for breeding by June 1, the most in four years, with a record 10.31 pigs being born per litter, U.S. Department of Agriculture data show. The cost of corn, the main feed grain, tumbled 32% in the past year. Hog futures for December (CME:HEZ13), which rose as high as 83.7 cents last month, will drop 8.2% to 75 cents a pound in Chicago by the time they settle, according to the median of nine analyst estimates compiled by Bloomberg.

Cheaper grain and higher hog prices are reversing producer losses that an Iowa State University economist estimated at $33 per animal and cut Smithfield Foods Inc. earnings by 49% last year. Hog farmers probably will earn $15 a head in the three months ending Sept. 30, according to Purdue University. The USDA predicts pork output will rise 3.1% to a record in 2014, easing pressure on global meat prices that rose the most in nine months in June and increased costs for Denny’s Corp. restaurants that added “baconalia” items to their menus.

“Profits are going to lead to expansion, and that’s going to lead to more hogs and lower hog prices,” said Ron Plain, a livestock economist at the University of Missouri in Columbia who has studied the industry for three decades. “We’re going to end up with more pigs being born in the second half of this year than anticipated. That’s going to be a drag on 2014.”

Peaking Prices

The Chicago Mercantile Exchange’s Lean-Hog Index, a measure of cash prices used to settle futures, surged 39% since the end of March to $1.0298 a pound yesterday. The Standard & Poor’s GSCI Spot Index of 24 commodities fell 1.3%, and the MSCI All-Country World Index of equities rose 3.1%. A Bank of America Corp. index shows Treasuries lost 2.4%.

While the hog herd on June 1 was little changed from a year earlier at 66.65 million head, the number of breeding sows was the highest since 2009, quarterly USDA data show. Domestic pork output will reach a record 23.4 billion pounds (10.6 million metric tons) in 2013 and increase to 24.135 billion next year, the department said July 11.

It takes about a year to produce a pig big enough to slaughter. The cost of corn plunged from an all-time high of $8.49 a bushel in August to $5.035 yesterday, with U.S. production poised to surge 29% to a record after last year’s drought. Goldman Sachs Group Inc. expects the grain to trade at $4.75 in three months.

Corn Costs

“We’re just about to the start line of expansion,” said Chris Hurt, a professor of agricultural economics at Purdue University in West Lafayette, Indiana. “Nothing like making money to keep producers interested in expansion.”

The drop in corn costs will also limit gains in hog and pork prices, curbing the incentive for boosting output, said Mark Greenwood, who oversees $1.4 billion of loans and leases to the hog business as a vice president at AgStar Financial Services Inc. in Mankato, Minnesota.

Hedge funds and other large speculators expanded bets on higher hog prices for 14 consecutive weeks by July 9 and are the most bullish since December 2011, U.S. Commodity Futures Trading Commission data show.

Demand for pork is growing in China, the biggest consumer, as middle-class incomes rise. Shuanghui International Holdings Ltd., based in Hong Kong, agreed in May to acquire Smithfield, the world’s largest producer, for $4.7 billion. U.S. output also may be limited by porcine epidemic diarrhea virus, which the U.S. has found in 16 states since April.

Herd Expansions

The rebound in grain supplies may trigger herd expansions over several years, said Purdue’s Hurt. Producers broke even in the three months ended June 30, ending losses that averaged $28 a head from the third quarter of 2012 through March 31, he said.

For farmers who didn’t hedge their production, losses probably averaged $33 an animal from August through May, said Shane Ellis, an agricultural economic specialist at Iowa State University in Carroll, Iowa. That would indicate a combined industry loss of $3 billion based on cash prices and the number of hogs sold, he said.

Next year, profit may average $10-$15 a head for most farmers who hedge their price risk, AgStar’s Greenwood said.

Smithfield Losses

Hedging curbed losses from hog production for Smithfield, which reported net income of $183.8 million in the 12 months to April 28, from $361.3 million a year earlier. The Smithfield, Virginia-based company, which earned money in its pork and packaged-meat units, said it lost about $7 a head. The hog unit had an operating loss of $119.1 million, compared with profit of $166.1 million a year earlier.

Smithfield, in a June 18 filing, predicted “lower raising costs and improved efficiencies and productivity in our hog- production segment should result in improved operating margins in the mid-single digits on a per-head basis” for the 2014 fiscal year.

U.S. consumers may pay as much as 2% more for pork this year, compared with a 3.5% increase in overall food costs, the government predicts. Global meat prices rose 2.1% in June, the biggest gain since September, and are up 4.5% in the past 12 months, United Nations data show. Global food costs gained 5.4% in the past 12 months.

Maple Bacon Sundae

Pork was one of the main contributors to commodity price inflation for Denny’s, a restaurant chain with 1,689 locations, Whit Kincaid, a senior director of investor relations for the Spartanburg, South Carolina-based chain, said on a conference call April 30. The company offered a “baconalia” menu as a spring promotion that included a Maple Bacon Sundae and Caramel Bacon Stuffed French Toast.

U.S. warehouses held a record 700.98 million pounds of pork in April, government data show. At the start of peak demand for the summer grilling season in May, supplies were the most ever for the month, according to the USDA.

Shipments from the U.S., the largest exporter, slid to 2.045 billion pounds in the five months through May 31, 13% less than a year earlier, USDA data show. China, including Hong Kong, bought 36% less as it sought to limit meat with ractopamine, a feed additive used by some U.S. farmers to add lean muscle in livestock.

The dollar’s rally to a three-year high on July 8 also has eroded the appeal of U.S. imports to overseas buyers.

Domestic demand has slowed as wholesale pork surged to $1.1133 a pound on June 26, the highest since at least October 1997, when government data begins. While prices have dropped 8.8% since, touching a four-week low of $1.0075 on July 11, they are 13% higher than a year earlier.

“I’m feeding my hogs heavier,” said Bill Tentinger, who markets about 10,000 hogs a year near Le Mars, Iowa. “The price of my inputs is still quite high, but the value of these hogs is so high. It just makes sense to put a few more hogs on and walk a few more pounds to town because of that.”

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