Corn slump could mean end to high pork prices
CHICAGO -- 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, Minn. Futures may drop as much as 16 percent 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."
Cheaper pork may help lower 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. 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 gained 15 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 1.8 percent, and Treasuries returned 3.5 percent, a Bank of America Merrill Lynch index shows.
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 to $7.50 a bushel or higher, he said.
"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, Ill. 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."
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.