Record pork supply seen as U.S. farms profit again

U.S. hog farmers are making money for the first time in a year after prices surged to a two-decade seasonal high and feed costs fell, spurring them to expand herds that will yield the most pork on record.

About 5.882 million sows were withheld for breeding by June 1, the most in four years, with a record 10.31 pigs being born per litter, U.S. Department of Agriculture data show. The cost of corn, the main feed grain, tumbled 32% in the past year. Hog futures for December (CME:HEZ13), which rose as high as 83.7 cents last month, will drop 8.2% to 75 cents a pound in Chicago by the time they settle, according to the median of nine analyst estimates compiled by Bloomberg.

Cheaper grain and higher hog prices are reversing producer losses that an Iowa State University economist estimated at $33 per animal and cut Smithfield Foods Inc. earnings by 49% last year. Hog farmers probably will earn $15 a head in the three months ending Sept. 30, according to Purdue University. The USDA predicts pork output will rise 3.1% to a record in 2014, easing pressure on global meat prices that rose the most in nine months in June and increased costs for Denny’s Corp. restaurants that added “baconalia” items to their menus.

“Profits are going to lead to expansion, and that’s going to lead to more hogs and lower hog prices,” said Ron Plain, a livestock economist at the University of Missouri in Columbia who has studied the industry for three decades. “We’re going to end up with more pigs being born in the second half of this year than anticipated. That’s going to be a drag on 2014.”

Peaking Prices

The Chicago Mercantile Exchange’s Lean-Hog Index, a measure of cash prices used to settle futures, surged 39% since the end of March to $1.0298 a pound yesterday. The Standard & Poor’s GSCI Spot Index of 24 commodities fell 1.3%, and the MSCI All-Country World Index of equities rose 3.1%. A Bank of America Corp. index shows Treasuries lost 2.4%.

While the hog herd on June 1 was little changed from a year earlier at 66.65 million head, the number of breeding sows was the highest since 2009, quarterly USDA data show. Domestic pork output will reach a record 23.4 billion pounds (10.6 million metric tons) in 2013 and increase to 24.135 billion next year, the department said July 11.

It takes about a year to produce a pig big enough to slaughter. The cost of corn plunged from an all-time high of $8.49 a bushel in August to $5.035 yesterday, with U.S. production poised to surge 29% to a record after last year’s drought. Goldman Sachs Group Inc. expects the grain to trade at $4.75 in three months.

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