U.S. hog producers are unlikely to increase the size of their herds because of the soaring cost of livestock feed, AgStar Financial Services Inc. said, signaling higher expenses for meat processors including Hormel Foods Corp. (HRL) and pricier pork chops at the grocery store.
“There’s just way too much inherent risk to expand your operation,” said Mark Greenwood, who oversees $1.4 billion in loans and leases to the hog industry as a vice president at AgStar in Mankato, Minnesota. “Anybody involved in the protein sector, your cost of production is going up exponentially. Pork at the retail level will have to go up.”
Seaboard Foods LLC (SEB), the third-biggest U.S. hog producer, said this week that the nation’s herd will be little changed this year. Prospects for increased animal supplies in the U.S., the world’s leading pork exporter, have been eroded by feed-corn prices that are 85 percent higher than a year ago, mostly because more of the crop is being used to make grain-based fuel, the company said.
Spot-hog prices, which rose 1 percent to 88.18 cents a pound yesterday, may climb to 95 cents to 98 cents in the three months starting June 1, said Altin Kalo, a commodity analyst at Steiner Consulting Group in Manchester, New Hampshire.
That would mark a gain of as much as 26 percent from the average price in that period a year earlier, possibly boosting expenses for Tyson Foods Inc. (TSN), the largest U.S. meat processor. In April, spot hogs reached 92.71 cents, the highest since at least 2003, government data showed.
Tight supply is “going to be a cost pressure for both Tyson and Hormel,” said Ann Gurkin, an equity analyst at Davenport & Co. in Richmond, Virginia. “Their input costs are going to go up as they buy hogs for their processing facilities.”
Processors probably will pass on higher costs, and consumers will face higher retail prices, said Gurkin, who rates Tyson as “buy” and Hormel “neutral.” In February, bone-in pork chops jumped to $3.751 a pound, the highest since at least 1980, and in March, bacon prices were 24 percent higher than a year earlier, government data show.
“A lack of expansion is not surprising, given pork producers’ lack of profitability,” Gary Mickelson, a Tyson spokesman, said in an e-mail. “Tight credit policies by lenders, high grain prices and regulatory restrictions have contributed to the lack of profitability, despite record high hog prices. Consumers will continue to face higher protein prices as long as these fundamentals remain in place.”
Springdale, Arkansas-based Tyson will have an “adequate supply” of livestock to “efficiently operate” plants, he said. Hormel, based in Austin, Minnesota, couldn’t be reached for comment.
Higher meat prices won’t be enough to spur bigger herds as long as cost remain high, said Joe Glauber, the chief economist at the U.S. Department of Agriculture. Shoppers may pay as much as 7.5 percent more for pork this year, the agency has forecast.
The U.S. sow herd on March 1 rose 0.5 percent from a year ago, government data show. AgStar’s Greenwood cited “some chatter” on the prospect of U.S. producers looking at building new sow units, he said. If that happens, the pigs wouldn’t come to market until the second half of 2012, he said.
Rising export demand for U.S. pork helped spur a 9.8 percent rally in hog futures in the past year. On April 1, the most-active contract on the Chicago Mercantile Exchange reached $1.0435 a pound, the highest since at least 1986.
Producers without hedging strategies made $2 for each animal sold in March and $4 per head in February, said Rich Nelson, the director of research at Allendale Inc. in McHenry, Illinois. That ended losses in the four months through January. Nelson had forecast herd expansion to begin at the end of August, based on the outlook for margins.
In April, hog futures fell 8.3 percent, the most since October. A slump in the past three weeks means “expansion is going to be on hold now,” Nelson said. Since hog producers are projected to be profitable through December, he said the chance for expansion by the end of the year is “50-50.”
An increase in animal weights will “help mitigate” the lack of expansion, Nelson said. The average hog carcass reached 211.31 pounds (96 kilograms) on April 22, just below the Jan. 7 weight of 211.59 pounds, which was the heaviest since at least 2002, USDA data show.
Weights averaged 208.24 pounds in April, up almost 3 pounds from a year earlier.
Increased export demand for U.S. meat is benefiting processors, Heather Jones, an analyst at BB&T Capital Markets in Richmond, Virginia, said last week. U.S. pork shipments climbed 7.2 percent in February to 387.6 million pounds (175,824 metric tons) from a year earlier, the latest government data show.
Companies such as Smithfield Foods Inc. that produce and process hogs may benefit from tighter supplies because of the rise in prices, Jones said.
She rates the Smithfield, Virginia-based company, the world’s largest pork processor, as “hold” and Tyson “buy.”.
Hog futures for June settlement fell 0.05 cent to settle at 92.375 cents a pound at 1 p.m. in Chicago.
Triumph Foods LLC is the second-biggest U.S. hog producer based on 2010 sow statistics, according to AgricultureOnline.
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