Hog Rally Seen as Producers May Cull Herds on Feed Costs

U.S. hog producers may start to cull herds as the faltering economic recovery curbs pork demand and tightening corn inventories boost livestock-feed prices, curbing animal supplies and increasing costs for meatpackers.

Since May 16, wholesale pork has dropped 9.6 percent from the highest since at least October 1997, while corn, the main ingredient in animal feed, gained 9.5 percent. Hog producers are facing record production costs, based on current futures prices, Steve Meyer, the president of Paragon Economics, said yesterday at the World Pork Expo in Des Moines, Iowa.

“I do not think there is any stomach in the industry for expansion, and there may be some contraction,” Ron Prestage, whose family business, Prestage Farms, has 170,000 sows in the Carolinas, Mississippi and Oklahoma, said in an interview at the expo. Hog futures may gain as much as 9.5 percent to $1 a pound by the end of August or early September without disruption to export demand, he said.

Hog producers without risk-management plans may lose $8 a head in the fourth quarter and $10 a head in the first quarter of next year, said Ron Plain, a livestock economist at the University of Missouri in Columbia. The breeding herd may start to shrink as soon as September, and that will reduce slaughter rates in the third quarter of 2012, he said.

Cutting Sow Herd

“Fewer hogs should mean higher hog prices, and my forecast would be that this isn’t a wonderful corn crop, and we will start cutting the sow herd this fall and help out hog prices,” said Plain, who has studied the industry for three decades.

He declined to give a price projection. Meat demand may ebb this year if the economy stumbles, Plain said.

Hog producers lost about $6.2 billion from October 2007 to February 2010, primarily because of high feed costs, Plain said.

A shrinking herd may increase costs for meatpackers such as Tyson Foods Inc., the biggest U.S. meat processor, said Heather Jones, a BB&T Capital Markets analyst in Richmond, Virginia.

Smithfield Foods Inc., the leading pork processor, raises its own animals and may benefit from a hog rally, Jones said. Higher feed costs may erode profit, she said. The company is based in Smithfield, Virginia.

‘Potential Contraction’

“In the case of pork packers, they’re not exposed to the cost of corn, but clearly the producer is, and I think these high feed costs are going to force some potential contraction in the hog herd,” Jones said.

Keira Lombardo, a spokeswoman, declined to comment on rising feed costs. Gary Mickelson, a Tyson spokesman, also declined to comment.

Tyson, based in Springdale, Arkansas, has forecast that grain costs in the year ending around Oct. 1 will increase almost $500 million from a year earlier.

U.S. shoppers may pay as much as 7.5 percent more for pork this year, more than overall food costs that are projected to jump as much as 4 percent, the government has forecast.

Tightening grain supplies and increased demand helped send global food prices higher in nine of the past 11 months, including a record in February, United Nations data show.

Corn prices have more than doubled in the past year as adverse weather slashed crops, global demand increased and use of the grain in the U.S. to make ethanol climbed.

In the U.S., the planting delays caused by excessive rain last month mean “a lot of uncertainty,” said Bob Nielsen, an agronomist at Purdue University in West Lafayette, Indiana.

‘Extreme Costs’

Gary Asay, a hog farmer in Osco, Illinois, said some ranchers fear that they won’t be able to afford high feed costs again and may have to reduce herds. He said that feed makes up about 70 percent of his input costs, up from 50 percent a year earlier.

“Some producers will not be able to endure the extreme costs and loss of profit for another year,” Asay, 55, said in an interview at the World Pork Expo. “Producers are very uncertain about the availability of corn.”

Decisions on liquidating herds may be made from August to December as the size of the corn crop emerges, and the cuts probably won’t occur until early next year, Asay said. He declined to give a price forecast for a hog rally.

Corn futures in Chicago have climbed 21 percent in 2011, while hogs gained 15 percent. In May, spot-market hogs fell 3.7 percent the first drop since October.

Corn Supplies Drop

“When corn initially made its run higher, hog prices ran right along with it,” Lawrence Kane, a market adviser at Stewart-Peterson Group in Yates City, Illinois. “The hog producer was buying more expensive feed but getting better prices. It was a wash. Now, he can’t say it’s a wash.”

Today, the Department of Agriculture slashed its estimate on U.S. corn inventories before the 2012 harvest by 23 percent to 695 million bushels from a month earlier. Analysts in a Bloomberg News survey expected supplies at 781 million.

This year, 45.608 million hogs were slaughtered as of June 4, down 1 percent from a year earlier, USDA data show. As of March 1, the breeding herd rose 0.5 percent to 5.788 million sows from a year earlier. The agency plans release its next inventory report on June 24.

Yesterday, hog futures on the Chicago Mercantile Exchange rose 2.1 percent to 91.35 cents. Corn on the Chicago Board of Trade jumped 3.7 percent to $7.64 a bushel.

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