Bringing home the bacon

The 2014 rally in hog prices is over as concerns over a deadly pig virus give way to an expanding supply of the animals.

After rising as much as 56% to an all-time high in the first quarter of 2014, hog futures (CME:HEG1) erased gains for the year today on prospects that U.S. pork production is headed to a record. The domestic herd jumped 6.1% in the three months ended Sept. 1, the largest gain since 1991, government data show.

Hogs are going the way of many commodities as glut of raw materials sends the Bloomberg Commodity Index lower for a fourth straight year. Prices have tumbled 36% from a record $1.33425 a pound reached in March as producers were able to rebuild herds following losses from the deadly porcine epidemic diarrhea virus. The bigger supplies signal U.S. consumers will keep paying less for bacon, after retail prices slid 5.7% from an all-time high reached in June.

“Hogs and pork are almost surely going to be cheaper, particularly compared to beef, next year,” Dan Vaught, an economist at Doane Advisory Services in St. Louis, said in a telephone interview on Dec. 5. “It certainly seems the industry is not very much concerned about recurrences during the next 3-4 months” of the pig-killing virus, he said. “They think the industry is probably better able to handle it than they were a year ago.”

Hog futures for February settlement fell 0.6% to close at 85.125 cents per pound at 1 p.m. on the Chicago Mercantile Exchange, leaving prices down 0.4% for the year. The commodity touched 84.6 cents, the lowest for a most- active contract since August 2013.

Pork production is forecast to climb 4.2% next year to 23.63 billion pounds, snapping two years of declines, the U.S. Department of Agriculture said in a report Nov. 10. Increasing domestic output will spur a decline in hog futures in 2015, Rabobank International said in a report e-mailed Dec. 1.

Weight Gain

A decline in corn (CBOT:ZCH15) prices this year has meant lower feed costs, allowing producers to fatten up pigs and helping to offset losses from animals that died from the virus. Average hog weights are about 2% bigger than a year earlier.

Increasing output may help tame rising consumer meat costs. Pork prices are estimated to gain 7.5% to 8.5% this year, compared with an increase of 2.5% to 3.5% in all food costs, according to the USDA. Pork is forecast to climb an additional 4.5% to 5.5% in 2015.

Bacon costs retreated to $5.759 a pound in October, from a record $6.106 in June, government data show. Consumers paid $4.174 a pound for pork-chops in October, the most ever.

Beef Premium

Bob Evans Farms Inc., the New Albany, Ohio-based restaurant chain, reported benefits from “some moderation” in sow costs in the quarter ended Oct. 24, while prices remain “historically high,” Chief Executive Officer Steven Davis said in a Dec. 3 earnings call.

Wholesale-beef prices reached a record premium against pork in late November, USDA data show. Expensive beef may spur increased consumer demand for pork next year, Christopher Narayanan, Societe Generale SA’s head of agriculture research, wrote in a report e-mailed Nov. 25.

“In the last couple of weeks, both pork and cheese have moderated a little bit,” Michael Lawton, chief financial officer of Ann Arbor, Michigan-based Domino’s Pizza Inc., said in an Oct. 14 earnings call. “And hopefully, that’s the start of something good.”

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