Hog-Herd Expansion Signaling Losses After Corn Surge Boosts Cost

Hog farmers in the U.S. probably expanded their breeding herds as feed costs tumbled through the end of May, just before a Midwest drought sparked a corn-price rally this month that was the biggest since April 2011.

About 5.854 million sows were being held back for breeding as of June 1, up 0.9 percent from 5.803 million a year earlier, according to a Bloomberg News survey of 10 analysts. The U.S. Department of Agriculture will release its quarterly estimate of hog inventories at 3 p.m. tomorrow in Washington based on a survey of producers in the first half of June.

Producers expanded as corn futures plunged to a 20-month low June 15 and the U.S. predicted a record crop. Since then, the worst Midwest drought in more than a decade is wilting fields two months before the harvest and sent prices up as much as 30 percent. That may change per-hog profit of $11 this month into a $9 loss by September, said commodity broker Allendale Inc.

“I would say the biggest factor behind growth is the expectation of a record corn harvest and lower prices come fall,” said Ron Plain, a livestock economist at the University of Missouri in Columbia who has studied the industry for three decades. “Of course, that looks less likely with each passing day.”

At the start of this year, hog producers expected profit of as much as $20 per head this summer as costs fell, according to McHenry, Illinois-based Allendale. Corn tumbled as much as 22 percent this year to a low of $5.0675 a bushel in Chicago on June 15. The grain rose to $6.33 yesterday, capping a four-day rally of 15 percent that was the biggest since April 2011. The increase “certainly” changes the expansion outlook for hog farmers, said Rich Nelson, Allendale’s director of research.

Losses Expected

While producers should earn about $10.84 per head in the three months through August, the higher feed costs will mean average losses of $9.41 a head for September through November, Nelson said.

Areas of Indiana, Illinois, eastern Iowa and Missouri have had less than half of normal rainfall in the past 30 days, National Weather Service data show. About 71 percent of the Midwest had abnormally dry soil to extreme drought on June 19, the worst in more than a decade and up from 1 percent a year earlier, according to the University of Nebraska at Lincoln.

Corn-crop conditions on June 24 were the worst for that date since 1988, according to the USDA. While the agency’s forecast on June 12 was for a 20 percent rise in U.S. production this year to a record 14.79 billion bushels, dry weather across the main growing region comes as plants begin to pollinate. That’s the most vulnerable period in the growing cycle, Dennis Gartman, the author of the Suffolk, Virginia-based Gartman Letter, wrote on June 26.

Hog Rally

Hog futures climbed 3 percent yesterday to 91.7 cents a pound on the Chicago Mercantile Exchange, the biggest gain this month. Prices are up 8.8 percent this year, the most after soybeans and wheat on the Standard & Poor’s GSCI Spot Index of 24 commodities, which has slumped 11 percent. The MSCI All- Country World Index of equities is up 1.4 percent. Treasuries have returned 1.9 percent, a Bank of America Corp. index shows.

Any expansion in sow production is bearish for prices, said Victor Aideyan, a senior risk-management consultant with HISGRAIIN Commodities Inc. in London, Ontario, who forecast an increase of 2.53 percent in the breeding herd in the three months through June 1.

“I scratch my head and wonder why people would be thinking expansion, but it looks as if it’s happening,” Aideyan said in a telephone interview. “If we end up with 2 percent more hogs this winter, I think we could overwhelm the packing capacity.”

Bigger Herd

The overall hog herd totaled 66.283 million head as of June 1, according to the Bloomberg survey, up 1.5 from a year earlier. The inventory of swine to be sold for slaughter, so- called market hogs, probably increased 1.5 percent to 60.429 million, analysts said.

U.S. pork production may be 23.385 billion pounds (10.6 million metric tons) this year, a 2.7 percent increase from a year earlier, and output in 2013 is forecast at 23.872 billion pounds, a 2.1 percent gain, the USDA said in a report on June 12.

Heavier animals also are adding to supplies. Hog carcasses weighed on average 204.85 pounds (92.9 kilograms) on June 26, up 0.6 percent from a year earlier. Weights reached 210.55 pounds on June 1, the heaviest since May 11, USDA data show.

Producers without hedging strategies lost about $11.24 for each animal sold in May, said Plain, citing data from Iowa State University in Ames. That compares with profits of $11.73 in the year-earlier period, the university’s data shows.

Hedged Risks

Producers using risk management over the last six months had opportunities to make money, and there was “some solid profitability” in the industry for long enough that some farmers were able to add more sows, Don Roose, the president of U.S. Commodities Inc. in West Des Moines, Iowa, said in a telephone interview.

Bill Tentinger, who markets about 10,000 pigs a year in northwest Iowa, said in a telephone interview that he started hearing from producers on the night of June 26 and yesterday morning that if the corn price continues to climb, there will “definitely not” be expansion. Some might consider retiring, selling their business or liquidating herds, he said.

Tomorrow’s report needs to be taken “with a little grain of salt” because corn has rallied so much since producers were surveyed, Tentinger said. Collection of survey data from producers started on May 31 and ended on June 19, according to Dan Kerestes, the chief of the livestock branch at USDA’s National Agricultural Statistics Service in Washington. Corn prices rallied 12 percent from June 19 through yesterday.

“A lot of producers anticipated that we were going to produce a really good corn crop, and finally the prices were going to start coming down to where a livestock producer could work with some decent margins,” Tentinger said. “I think Mother Nature is proving us wrong.”

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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