Pork Prices Tumble From Record Highs as Corn Bust Spurs Jump in Hog Herds

The biggest slump in corn in three years may mean the end of record pork prices as cheaper feed spurs farmers to expand hog herds for the first time since 2007.

Corn-feed prices dropped to a six-month low on July 1 after the government said farmers planted the second-highest number of acres since 1944, while traders were anticipating a drop. Record pork exports helped drive hog futures to the highest level in a quarter century in April, returning the industry to profit after $6.2 billion in losses in the 29 months through February 2010.

Midwest farmers may make $20 a pig in the next 12 months, compared with a loss of about $20 at the end of 2010, said Mark Greenwood, who oversees $1.4 billion in loans and leases to the industry as a vice president at AgStar Financial Services Inc. in Mankato, Minnesota. Futures may drop as much as 16 percent from the closing price on July 15 to 76.95 cents a pound next year if expansion occurs, according to the average estimate in a Bloomberg survey of 11 analysts.

“Once we see that corn crop is there and that those input costs are going to come down and stay down, there will be some expansions,” said Bill Tentinger, who markets about 10,000 pigs a year in northwest Iowa and anticipates producing about 20 percent more this year. “I am going to produce more pounds of pork. I’m doing it cautiously. That’s what you’re going to see in the industry, people are going to be very cautious.”

Food Inflation

Cheaper pork may help lower U.S. consumer prices that rose 3.6 percent in May, the biggest year-on-year gain since October 2008. The government has forecast shoppers will pay as much as 7.5 percent more for pork in 2011, topping the 4 percent jump in overall food costs, and fast-food chain Jack in the Box Inc. (JACK) and steakhouse Texas Roadhouse Inc. have raised prices to cope with higher commodity costs.

Corn, the main ingredient in feed, fell 17 percent in June as farmers planted more crops to take advantage of prices that reached a three-year high. Hog futures on the Chicago Mercantile Exchange have gained 13 percent this year, as the U.S. exported more pork than any other nation and the U.S. Meat Export Federation predicted record shipments this year. The MSCI All- Country World Index of shares rose 1.3 percent, and Treasuries returned 3.5 percent, a Bank of America Merrill Lynch index shows.

Hog Futures

Hog futures for October settlement fell 1.35 cents, or 1.5 percent, to settle at 90.3 cents on the Chicago Mercantile Exchange, after declining the CME’s 3-cent limit to 88.65 cents, the lowest for the most-active contract since June 7.

Farmers may delay expansions for now because of concern that the U.S. Department of Agriculture is overestimating corn supplies, AgStar’s Greenwood said. Some may wait until their profit per pig exceeds $15 for another five to six months before adding sows to their breeding herds, pushing back gains in supplies to slaughterhouses to 2013, he said.

The USDA is underestimating planting delays caused by floods and drought and the risk that yields will decline before the harvest begins in September, said Hussein Allidina, the head of commodity research at Morgan Stanley in New York. The department will revise its estimates, and grain for December delivery should rally 9.5 percent from last week’s closing price to $7.50 a bushel or higher, he said.

‘More Caution’

“There’s more caution than there is optimism,” said Doug Wolf, the president of the National Pork Producers Council, an industry group based in Des Moines, Iowa. “Nobody wants to expand if they’re not certain they’re going to have any feed.”

Rising exports also should help keep pork prices near a record, said Rich Nelson, the director of research at broker Allendale Inc. in McHenry, Illinois. Shipments may increase 8 percent to 2.07 million metric tons this year, said Dan Halstrom, a spokesman for the U.S. Meat Export Federation.

“Once we get into 2012, even though we will have a little higher supplies than the trade is expecting, we have to understand that 2012 will be a meat-deficit year,” Nelson said. “The message for 2012 pricing is slightly higher supplies, balanced by much stronger demand.”

U.S. exporters shipped 2.08 billion pounds (942,288 tons) of pork in the first five months of 2011, 18 percent more than a year earlier, government data show. The biggest buyers were Japan, Mexico and South Korea. Futures on July 11 rose by the 3- cent exchange limit on speculation that China, the world’s largest pork consumer, will accelerate imports to damp domestic prices that were 57 percent higher in June than a year earlier.

Retail Pork Prices

U.S. retail-pork prices in May reached an all-time high for the second month in a row, with boneless ham fetching $3.65 a pound, the highest since at least 1991, government data shows. In February, pork chops touched $3.751 a pound, the highest since at least 1980. In June, retail bacon prices averaged $4.84 a pound, the highest since at least 1980.

The surge is increasing expenses for restaurants. Jack in the Box contended with “significant increases” in pork costs in the second quarter, Chief Financial Officer Jerry P. Rebel told analysts in a conference call May 19. The San Diego-based company, which has 2,200 restaurants across 19 states, paid 5 percent more for commodities in the period, compared with 2.3 percent in the first quarter, he said.

Cracker Barrel Old Country Store Inc. saw “sharply higher pork prices” in its fiscal third quarter that meant higher- than-anticipated commodity inflation, Chairman and Chief Executive Officer Michael A. Woodhouse told analysts on a conference call May 24. The Lebanon, Tennessee-based company operates more than 600 restaurants across 42 states.

Wendy’s Raising Prices

Wendy’s Co., maker of the 930-calorie Baconator Double burger, is raising some prices to reflect “significant commodity inflation,” Chief Financial Officer Stephen E. Hare told a conference in Boston on June 29. Texas Roadhouse Inc. (TXRH) is raising prices by almost 1 percent this month because of the cost of food, particularly pork, Chairman Wayne Kent Taylor told a conference in Nantucket, Massachusetts on June 22. The Louisville, Kentucky-based company has more than 345 restaurants across 46 states.

Pork prices surged after the U.S. breeding herd shrank to the smallest on record in the first quarter of 2010 as farmers sought to contain losses. While corn still costs 69 percent more than a year ago, sows are producing the biggest litters ever, helping to shore up margins. The average litter was a 10.03 piglets in the three months ended May 31, government data show.

U.S. Pork Output

U.S. pork production may climb 1.6 percent to almost 23.07 billion pounds next year, the USDA forecasts. The average American will eat 46.7 pounds of pork next year, 0.9 percent more than in 2011, the department estimates.

Farmers are showing the most interest in expanding their herds since 2007, said Kent Mowrer, a field specialist at the Coalition to Support Iowa’s Farmers, a West Des Moines-based non-profit industry group. Some are already building new hog barns and others are looking for help in finding new sites to expand into, he said.

Expansions may help the economy of Iowa, the biggest U.S. hog-producer. The state’s unemployment rate of 6 percent compares with the national average of 9.2 percent. Its pork industry employs 39,000 people directly and contributes almost $5 billion a year to the state economy, according to the Iowa Pork Producers Association.

“There’s going to be some lean years for grain farmers and it’s going to swing back to the livestock industry, which is going to have some good years,” said Mark Brummer, a 52-year- old Illinois farmer who has raised hogs for three decades and decided to add about 85 percent to his production capacity in January. “In order to stay competitive in the business, we had to expand just to keep up with what’s going on in the industry.”

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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