Dec. 22 (Bloomberg) -- Christmas ham is about to get more expensive. A lot more.

Hog prices are poised to jump 46 percent by June to the highest since May 1996 as producers slaughter more breeding sows to limit losses from rising feed costs, said Jason Britt, president of Central States Commodities Inc. in Kansas City, Missouri. Fewer pigs may boost the cost of everything from Hormel Foods Corp.’s Spam to Sara Lee Corp.’s Jimmy Dean sausage.

In the worst year for commodities in at least five decades, hogs rose 6.6 percent, the second-biggest gains on the Reuters/Jefferies CRB Commodity Index, behind cocoa. The same global economic slowdown that halted six years of rising demand for gasoline, cotton and copper also set the stage for cutbacks in hog supplies.

“We’re going to have 3 to 4 percent less pigs next year, and that should be very supportive to higher pork prices,” said Mark Greenwood, who manages about $1 billion of loans and leases to swine producers for AgStar Financial Services in Mankato, Minnesota. “There is the potential for producers to have a better year in 2009.”

Hog futures reached a 15-month high of 79 cents a pound on June 23 and may rise to 90 cents within a year, the highest since May 1996, Britt said. The most-active contract closed at 61.7 cents on Dec. 19 on the Chicago Mercantile Exchange.

‘Defensive’ Bet

Goldman Sachs Group Inc. told clients in a Dec. 11 report to buy agricultural futures as the best “defensive” bet among commodities, citing global population growth. The bank forecast hogs will jump to 75 cents in the next six months, a 19 percent gain from Dec. 10, while crude oil, natural gas, aluminum, copper, nickel and zinc will decline. Goldman predicted a 32 percent jump in corn and double-digit gains for wheat, sugar, cotton and coffee.

“In the middle and latter stages of recession, energy and base-metals markets tend to underperform,” Barclays Capital said in its 2009 commodity outlook report to clients on Dec. 18. “Gold, agriculture and livestock tend to outperform other commodities, and it is these sectors that could prove most robust in early 2009.”

Hogs are getting a boost from improved demand for pork. On average, each American will eat 50.2 pounds of the meat in 2009, up 1.8 percent from 49.3 pounds in 2008, the U.S. Department of Agriculture estimates. Annual per capita beef consumption will decline 1 percent next year to 62.1 pounds, the agency said.

Retail U.S. pork prices reached $3.002 a pound in the third quarter, the highest since at least 1970, government data show. Ham prices averaged $2.466 a pound in November, up from $2.29 a year earlier, according to USDA.

Pork Demand, Ethanol

Worldwide, pork consumption will reach 97.6 million metric tons in 2009, up 1.3 percent from this year, the third- consecutive annual increase, USDA data show. Chinese consumption may rise 2.9 percent to 46.2 million tons, the agency said.

Hog farmers blame the six-year rally in energy costs and the policies of President George W. Bush for increasing prices of animal feed and forcing them to cut production even as demand rises.

The 278 percent rise in oil in four years through June 30, which led to a 114 percent gain in the pump price of gasoline tracked by AAA, prompted the U.S. to boost requirements for alternative fuels. The amount of the domestic corn harvest used to make ethanol this year jumped 43 percent to 3.03 billion bushels, and the USDA forecast Dec. 11 that grain usage for fuel will reach 3.7 billion next year.

Tighter supplies sent corn on the Chicago Board of Trade to a record $7.9925 a bushel on June 27, triple the cost two years earlier. Feed costs remained high even after corn fell 52 percent in the second half because hog producers were locked into long-term contracts.

Prolonged Losses

“Feed costs have really hurt the industry,” said Sam Carney, who raises 4,000 to 5,000 animals on his farm in Adair, Iowa, and is vice president of the Washington-based National Pork Producers Council. “This summer we had good hog prices, but it wasn’t enough to cover costs of raising a pig.”

Farmers lost money on every hog sold during 14 of the past 16 months, according to Ron Plain, a livestock analyst at the University of Missouri in Columbia. On average, the loss was $45 per head in November, compared with a loss of $29 each a year earlier, he said.

It takes about six months to raise a pig to its slaughter weight of 270 pounds (122 kilograms), including as much as five months eating grain. To limit spending on feed and curb losses, U.S. producers probably cut the number of breeding sows in the fourth quarter to 6.034 million, the fewest in two years, Plain said.

High Costs Linger

“From the time you decide to reduce the sow herd, it’s a year before you see lower output,” said Steve Meyer, president of Paragon Economics in Des Moines, Iowa. “We’re still responding to the feed-price shock of last winter.”

While corn has tumbled, Smithfield Foods Inc., the world’s largest hog producer, will pay about $6 a bushel for the grain in the next two quarters, Chief Financial Officer Robert Manly said during a conference call on Dec. 4. Corn closed at $3.8075 on Dec. 19.

The Smithfield, Virginia-based company reported a 76 percent drop in fiscal second-quarter profit on Dec. 4, citing higher feed costs. The hog unit had a loss of $58 million. Analysts expect Smithfield to report its first fiscal-year loss of about 9 cents a share, excluding some items, based on the average of 11 estimates in a Bloomberg survey.

Shares Plunge

Smithfield plunged 60 percent this year on the New York Stock Exchange, the worst performer of the 16 companies tracked by the Standard & Poor’s Midcap Consumer Staples Index.

Tyson Foods Inc., a U.S. beef, poultry and pork producer, dropped 47 percent as grain costs led to losses in its chicken unit. Chief Executive Richard L. Bond said Nov. 10 that Springdale, Arkansas-based Tyson will likely have a loss in the fiscal first quarter that ends this month. The loss will be 16 cents a share, based on the average of 10 analysts in a Bloomberg survey.

Costs for Smithfield and Tyson may keep rising, eroding profit, because they are getting fewer hogs from Canada, the largest foreign supplier to the U.S., said Dave Bauer, president of Brite Futures Inc. in Milwaukee.

Canada Exports Slow

Canadian hog shipments plunged since Sept. 30, when the U.S. enacted the Country of Origin Labeling law, which requires all food sold in the U.S. to show where it was produced. Since then, imports from Canada fell 27 percent through Nov. 22 to 1.19 million hogs, USDA data show.

“With all that’s going on, I still think the futures prices hold a relative amount of value in the market because I do feel that we’ll see price improvements because of the lower numbers,” Bauer said.

Smithfield said Sept. 24 it will slaughter only domestic pigs at its U.S. plants, partly because of the new law. The company has reduced its hog-breeding herd by 7 percent this year. Hormel, based in Austin, Minnesota, said its first-quarter costs may rise as hog supplies drop 3 percent to 4 percent.

Producers will return to profitability next year as prices rise, Bauer said. Losses will narrow to as much as $8 per animal in the first quarter, before farmers earn a profit of about $7 each in the second quarter and $16 in the third and fourth quarters, he said.

Slow Economy, Dollar Gain

The rally may be limited by the same economic slowdown that popped the commodity bubble earlier this year, particularly in China, the world’s largest pork-consuming country. China, including Hong Kong, was the second-biggest buyer of U.S. meat this year.

The USDA cut its forecast of pork exports for next year to 4.1 billion pounds, down 8.9 percent from its estimate in November. Exports to China, including Hong Kong, tumbled 29 percent in October compared with the same month last year. Chinese pork demand began shrinking after the 2008 Olympics in August and as the country boosted domestic production.

A stronger dollar also may make U.S. pork more costly for importers. The U.S. Dollar Index, a measure of six major currencies, rose 6 percent this year, heading for its first annual gain in three years.

The U.S. Meat Export Federation expects sales at 1.72 million metric tons of pork next year, down 7.4 percent from 2008. Exports to Japan, Mexico and Europe may increase while shipments to Korea, Russia and China-Hong Kong will shrink, the organization said. By 2015, exports may reach 2.17 million tons, the group said.

While the global recession will take its toll on pork exports from the U.S., sales of the meat probably won’t lag behind as much as some other higher-priced cuts, Plain said.

“The big, big uncertainty hanging over all this is the recession and how deep is it going to be and how long it’s going to last,” Missouri’s Plain said. “Pork won’t suffer as bad in a recession as will beef and chicken. It tends to be a cheaper cut of meat on average by quite a bit.”

To contact the reporters on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net; Tony C. Dreibus in Chicago at Tdreibus@bloomberg.net

Last Updated: December 22, 2008 00:00 EST