Hog Glut Gains as U.S. Exports Drop Most in Decade: Commodities

U.S. hog farmers are poised to produce a record amount of pork at a time when exports are slumping the most in more than a decade, prolonging a global glut into a fifth consecutive year.

The 10.66 million metric tons produced will be the most since at least 1970, the U.S. Department of Agriculture estimates. Exports fell 14 percent in the first two months, the most for the period in government data since 2000. Futures may drop 20 percent to 72 cents a pound by the end of the year on the Chicago Mercantile Exchange, based on the median of nine trader and analyst estimates compiled by Bloomberg.

Demand for pork from the U.S., the biggest exporter, is weakening as importers from South Korea to Japan expand domestic output. Exports are also retreating as China and Russia, the largest buyers after Japan, curb purchases of meat produced with ractopamine, a feed additive used in the U.S. Farmers are expanding output because costs are dropping as grain prices tumble from records set during last year’s drought.

“It’s hard to be very bullish right now,” said Ron Plain, a livestock economist at the University of Missouri in Columbia who has studied the industry for about three decades. “2014 is likely to have more pork if the corn outlook turns out the way we expect it to.”

Futures Contracts

Hogs for settlement in June, the most widely held contract on the CME, declined 7.7 percent to 90.35 cents this year. The Standard & Poor’s GSCI Agriculture Index of eight commodities fell 5.8 percent, and the MSCI All-Country World Index of equities rose 4.6 percent. Treasuries returned 0.6 percent, a Bank of America Corp. index shows.

The U.S. hog herd reached 65.91 million head March 1, 1.5 percent more than a year earlier and the most for the date since 2008, USDA data show. The supply of breeding animals, an indication of future supply, was the most since 2009. Corn futures fell 25 percent in Chicago since reaching a record in August, as farmers prepare to plant the most acres since 1936.

Global pork production will rise 0.3 percent to an all-time high of 104.71 million tons this year, according to data from the USDA in Washington. Demand is estimated at 104.25 million tons, the highest level on record.

The U.S. shipped 820.8 million pounds (372,300 tons) in the first two months of 2013, USDA data show. Exports to China slumped 43 percent. The Asian nation said in February it would tighten import controls to ensure meat excluded ractopamine, used by some farmers to add lean muscle in livestock. The Chinese market remains open to U.S. pork, said Joe Schuele, a spokesman for the Denver-based U.S. Meat Export Federation.

Beef Products

Russia banned U.S. pork and beef products in January, citing ractopamine. The country also barred some pork from Germany, the Netherlands, Spain, Mexico and Canada in the last several months because it said production facilities failed to meet safety standards, according to Rosselkhoznadzor, the food safety regulator.

Hedge funds and other large speculators are betting on higher prices again for the first time since February, after being bearish for five consecutive weeks, U.S. Commodity Futures Trading Commission data show. Their net-long position of 2,967 futures and options contracts is still only about 13 percent of the average bullish wager over the past five years. One futures contract is currently valued at $35,610, bourse data show.

Futures Prices

The anticipated slump in prices may be curbed by a seasonal surge in U.S. demand as warmer weather spurs more grilling outdoors. Production typically drops to its low each year from May to July because animals tend to gain less weight when temperatures rise. Futures will have a “spring rally into the summer” and exceed 90 cents a pound, said David Kruse, the president of CommStock Investments Inc., a brokerage in Royal, Iowa, who has tracked the market since the 1970s.

Lower futures prices won’t necessarily mean cheaper meat for consumers, according to the USDA, which is predicting a 3 percent to 4 percent gain in retail costs this year, the same as its outlook for overall food inflation. Global meat prices fell 2 percent in March, the most since June, the United Nations’ Food & Agriculture Organization said April 11.

Retail pork-chop prices rose 1.9 percent in the U.S. this year, compared with an 8.2 percent rally in ground beef and a

2.2 percent gain for boneless sirloin steak, according to the Bureau of Labor Statistics. Pork consumption will rise 2 percent to a three-year high of 46.8 pounds per person, as beef demand retreats 3 percent to the lowest since at least 1970, USDA data show.

Largest Exporter

Cracker Barrel Old Country Store Inc., the operator of 622 restaurants across 42 states, expects food commodity costs to rise 4 percent to 5 percent this fiscal year, with pork among the biggest increases, Chief Financial Officer Lawrence E. Hyatt said on a conference call in February.

Declining output in the European Union, the second largest exporter, may also limit world supply. The 27-nation bloc will produce 3 percent less than last year because farmers will cull herds in response to new regulations increasing the amount of space required for breeding sows, Rabobank International estimates. The EU Commission, the administrative arm, expects exports to retreat 14 percent.

The U.S. is “well positioned” to make up for any drop in EU sales, Smithfield Foods Inc. Chief Executive Officer C. Larry Pope told analysts on a conference call March 7. The Smithfield, Virginia-based company is the world’s biggest hog and pork producer. Its shares rose 19 percent to $25.57 this year and will reach $29.89 in 12 months, the average of nine analyst estimates compiled by Bloomberg show.

Frozen Stockpiles

Prices are already falling outside the U.S. China’s hog production, the world’s biggest, may climb to a record 690 million animals this year, the USDA estimates. The government is stockpiling frozen pork across more than 20 provinces to stem the plunge in prices, the National Development and Reform Commission said April 7.

“Assuming we get a more normal year weather-wise then feed prices are more likely to come down than go up,” said Stephen Howarth, a senior analyst at the U.K. Agriculture & Horticulture Development Board’s pig unit in Kenilworth, England. “There will be opportunities for expansion fairly quickly.”