Dairy, Meat Prices Will Spur Food Inflation, Wells Fargo Says

Dec. 14 (Bloomberg) -- Rising milk, beef, pork and chicken prices will double the pace of U.S. food inflation next year as livestock supplies shrink and rebounding economies boost demand, said Michael Swanson, a senior economist at Wells Fargo & Co.

Food prices may jump as much as 6 percent in 2010, Swanson said. The U.S. Department of Agriculture on Nov. 25 forecast 3 percent to 4 percent food inflation next year, up from an estimated 1.5 percent to 2.5 percent in 2009.

Producers of cattle, hogs, dairy cows and poultry cut output after a jump in feed costs last year, reducing supplies as demand for meat is rising at home and abroad, Swanson said. Corn, the main source of animal feed, will rally next year because of record demand for grain to make ethanol, he said.

“Protein inflation is going to be much higher than people are anticipating,” Swanson said Dec. 9 in an interview from Minneapolis. “Corn is a proxy for feed costs, and right now the value of all meat and dairy output is below the price of feed on a long-term relative basis.”

Goldman Sachs Group Inc. said in a Dec. 3 report that cattle futures will increase over the next year by the most since 1978, and hogs will gain the most in six years. Cattle futures on the Chicago Mercantile Exchange will reach $1.10 a pound by December 2010, Goldman said. That would be up 32 percent from 83.275 cents on Dec. 11. Hog futures will reach 80 cents a pound, the bank said, which would mean a 22 percent rally from last week’s close at 65.425 cents.

Sustainable Rally

“As we start a new decade with the global economy emerging from the worst recession of the postwar era, we expect the commodity supply-side constraints of the past decade to once again re-emerge, reinforcing the sustainability of higher long- term commodity prices,” Goldman analysts including Jeffrey Currie wrote in a note to investors. “Economic recovery suggests rising meat demand amid tighter supplies.”

Wholesale-pork prices in the U.S. are up 27 percent this year, heading for the first annual gain since 2004. Farmers, hurt by two straight years of losses, are cutting the domestic breeding herd to the smallest level since the USDA started collecting the data in 1964. Chicken output is sliding in the U.S., where the number of eggs placed into incubators each week is headed to the lowest quarterly average since 2002.

Smithfield Foods Inc., the world’s largest hog producer, has had four straight quarterly losses. Last week, the company reported a loss of $26.4 million loss in the three months ended Nov. 1.

The Smithfield, Virginia-based processor has reduced the size of its breeding herd by 13 percent, or 130,000 sows, which will cut the number of market hogs it raises by more than 2.2 million annually, Larry Pope, the chief executive officer, said Dec. 10 during a conference calls with analysts.

Beef Herd

The U.S. beef-breeding herd on July 1 totaled 32.2 million head, down 1.4 percent from 32.65 million a year earlier, and was the smallest since the government started collecting data in 1971, the USDA said July 24. The number of dairy cows fell 2.4 percent to 9.098 million head at the end of October from a year earlier, reaching the smallest monthly total since December 2005, the USDA said last month.

Retail-food costs by December 2010 will be up 4 percent to 5 percent, marking the highest rate of increase since the 26- year high of 5.8 percent in 2008, said Bill Lapp, the principal of commodities research firm Advanced Economic Solutions LLC in Omaha, Nebraska.

Dairy Rally

Dairy prices will rise as much as 20 percent, leading the increase in food costs, Lapp said in an interview on Dec. 11. Chicken and vegetable-oil prices will rise 7 percent to 9 percent in 2010, he said.

The accelerated pace of food inflation has been set in motion by last year’s grain rally and this year’s drop in livestock herds and poultry flocks, Lapp said. Rising energy costs also will contribute to the gains, he said.

“Next year will be just the beginning,” Lapp said. “Food manufacturers and restaurants will be hurt the hardest. They will have to find a way to manage the price increases by either cutting costs or passing along higher prices.”