Thursday, April 29, 2010

Carnivores’ Dilemma Widens as Pork Signals Meat Surge (Update1)

April 26 (Bloomberg) -- U.S. meat prices may rise to records this summer after farmers reduced hog and cattle herds to the smallest sizes in decades, the result of surging feed costs linked to demands for more ethanol.

Wholesale pork jumped as much as 25 percent this month to 90.68 cents a pound last week, the highest since August 2008, U.S. Department of Agriculture data show. Beef climbed 22 percent this year to $1.6896 a pound on April 23, the most expensive since July 2008. Chicken’s gain in March was the most in 20 months.

Demand for pork chops, steaks and chicken breasts is rising as the economy improves, backyard barbecues resume and China and Russia allow more U.S. imports. Domestic supplies may drop to a 13-year low because of culls to stem losses caused by corn prices that doubled after former President George W. Bush set targets to increase ethanol use.

“Ethanol-induced prices in meat are just now getting to the marketplace,” said Steve Meyer, the president of Paragon Economics, a meat industry consultant in Des Moines, Iowa. “Consumers are going to see the highest prices they’ve ever paid in meat and poultry because of the decisions made to make corn into ethanol.”

Hog futures have almost doubled from a low in August to 85.175 cents a pound on the Chicago Mercantile Exchange on April 23. The price may reach $1 by June, said Tom Cawthorne, director of hog marketing at broker R.J. O’Brien & Associates in Chicago. CME cattle jumped 14 percent in the past year.

Meat-Price Outlook

Retail prices may hit records in the next 90 days as U.S. demand peaks during summer grilling season, said John Nalivka, a former USDA economist and the president of meat consultant Sterling Marketing Inc. in Vale, Oregon. The previous records were in 2008 for pork at $3.026 a pound in September, based on monthly averages tracked by the USDA since 1970, and for beef at $4.526 a pound in August. Chicken’s peak was $1.857 a pound in May 2009.

More expensive pork and beef may revive food inflation that dropped last year for the first time since 1961. Meat prices tracked by the United Nations Food and Agriculture Organization are up 5 percent this year, even as food costs fell 5.8 percent.

The rally also means a boost for livestock producers including Smithfield Foods Inc., the world’s largest pork processor. The Smithfield, Virginia-based company said April 21 that its hog-rearing unit will be profitable in the fiscal year that begins in May, its first period without a loss since 2007.

Consumers May Balk

Prices may be peaking, if futures markets are a guide. Hogs for settlement in May through August are trading between 85 cents and 87.4 cents a pound, a narrow range that may signal prices are near their top, said Ron Plain, a livestock economist at the University of Missouri in Columbia.

Consumers may choose cheaper food with the unemployment rate in March at 9.7 percent, near a 26-year high.

“The key question is if the U.S. economy is strong enough to sustain higher grocery store prices for meat,” Plain said. “We had been expecting a late summer peak, but I’m afraid we may end up with a late spring peak.”

Supermarkets have been “holding the line” on consumer costs, Paragon’s Meyer said. In March, retail beef on average was little changed from a year earlier, 4.8 percent below its record high, USDA data show. Pork was 1 percent lower than the same month in 2009 and 3.7 percent from its peak, while chicken was 9.6 percent below the record high set last year.

‘Cycle Has Turned’

Producers are optimistic for the first time in more than two years because output is falling as demand accelerates.

“The cycle in hog production has turned,” Smithfield Chief Executive Officer C. Larry Pope said on a March 26 conference call with analysts. “We have been through a long period of prolonged losses in the live-production side of the business. We’ve been talking about that for a long, long time. We are seeing a period in which our costs are going down and our hog prices are moving up.”

Smithfield cut its hog-breeding herd by 13 percent since early 2008. As of March 1, the total U.S. sow herd shrank by 7.1 percent in two years to 5.76 million animals, the fewest in at least 47 years, USDA data show. Cattle farmers slashed herds in January to the smallest in 51 years, and the government estimates that supplies may not rebound until 2013.

Elaine Johnson, an analyst at CattleHedging.com LLC in Westminster, Colorado, estimates that U.S. per-capita supplies of beef, pork and poultry will be the smallest since 1997. It takes 10 or 11 months to raise a hog from conception to slaughter weight and about three years for cattle.

‘Mighty Good’ Price

“Pork prices will continue to gradually creep up,” said Zack McCullen III, the vice president of swine production at Prestage Farms Inc., the fifth-largest U.S. hog farm. “If you look at futures this week, they look mighty good. I think they’ll definitely hold up for a while.”

Clinton, North Carolina-based Prestage, which produces about 650 million pounds of pork annually, cut its sows 10 percent last year, McCullen said. “Ethanol was the main driver in corn prices going up to historical levels,” he said. “Ethanol was the pork producers’ biggest problem.”

The hog industry lost about $6.2 billion from October 2007 until last month on rising feed costs and lower export demand caused by swine flu, Missouri’s Plain said. Profits returned as corn futures on the Chicago Board of Trade dropped from a record $7.9925 a bushel in June 2008 to $3.61 on April 22.

Ethanol refiners are using more of the U.S. harvest than ever. An estimated 4.3 billion bushels, or 33 percent, of last year’s crop will be used for fuel, compared with 3.049 billion bushels, or 23 percent, in 2008, USDA data show.

Ethanol Mandate

Bush signed the Energy Independence and Security Act in 2007, increasing the ethanol mandate to 15 billion gallons a year by 2015 from about 10.5 billion in 2009, in a bid to cut dependence on foreign fuel and curb emissions.

Ethanol producers say their industry is unfairly blamed for the record feed costs of 2008. The surge reflected “wild speculation in the markets and the surge of index funds” rather than the jump in corn use for fuel, said Chris Thorne, a spokesman for Growth Energy, a Washington-based ethanol trade group. “Grain producers in this country will more than meet all expected demand for export, for food, for livestock feed and certainly for fuel.”

The USDA estimates farmers harvested a record 13.131 billion bushels of corn last year.

Bullish Speculators

Speculators remain bullish. Hedge funds and commodity index funds held record positions in cattle futures on April 20, while reducing net-long positions in hogs by 0.6 percent from a record on April 13, government data show. In September, speculators had a record bet against hogs, after prices reached a six-year low in August.

Even with lower feed costs in 2010, hog farmers may not expand herds for another two years, partly because banks tightened lending requirements during the recession, said Neil Strother, whose farm in Wilson, North Carolina, owns about 5,000 sows. Strother said he liquidated 15 percent of his herd last year.

“From the largest producer to the smallest producer, none of us want to see production ramp up right now,” he said.

Dwindling Inventories

Rising overseas demand may erode inventories for pork that in March were the lowest for that month since 2007, the government said on April 22. Beef stockpiles in March were the lowest for any month since July 2005, and the USDA forecasts exports will jump 9.7 percent this year.

Brett Stuart, managing partner at Global AgriTrends, a consulting company in Denver, expects pork exports to China, including Hong Kong, to climb 22 percent this year from 2009. The government predicts total U.S. pork exports will increase 5.7 percent this year. In March, China lifted a ban on U.S. pork put in place after the swine-flu outbreak last year.

“We’ve been living a little on borrowed time as consumers,” said Bill Lapp, a former chief economist for ConAgra Foods Inc. who is the president of consultant Advanced Economic Solutions in Omaha, Nebraska. “The confluence of reduced production and improving export markets are supporting wholesale prices and eventually that’s going to turn into higher consumer prices.”

--Editors: Steve Stroth, Michael Arndt.

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