January 17, 2007

 

More closures for US pork plants expected if corn prices stay high

 

 

As hog supplies dwindle due to ever increasing feed prices, pork processors may have to compete more fiercely for available supplies, resulting in more plant closures in the process, industry experts said.

 

Although US hog slaughter capacity is expected to increase within the next two to three years, swine production is expected to eventually decline.

 

This meant closures for the older and less efficient plants, experts said.

 

Corn prices have been rising due to growing demand from ethanol producers. At the Chicago Board of Trade, corn prices rose about 70 percent in 2006.

 

Hog prices through December were high enough for profits, but lower prices and high feed costs would likely result in losses for some producers during the first quarter.

 

The rise in corn prices is expected to be permanent, causing farmers to leave the  business or reduce their herds, experts said, leading to a possible shake-up in hog processing

 

The non-vertically integrated packers, or those that purchase most of their supply needs, are at the highest risk of closing one or more plants.

 

Yet, at this time, the processing industry is adding processing capacity to the nation's hog slaughter.

 

Triumph Foods, a hog producer-owned company, is building its second pork plant in East Moline, Ill. The company's only plant, located in St. Joseph, Mo was opened in early 2006. A second shift operation was added there in August. Both plants will be able to process around 16,000 head per day.

 

The addition of the second Triumph Foods' plant would put the US daily hog slaughter capacity at around 443,000 head. Until late August 2006, the daily slaughter record stood at 411,088 head.

 

The rise in demand for corn and the high prices following could cause cutbacks in hog production in the US as well as in Canada.

 

Industry sources say reductions in domestic pork output could come in the form of fewer hogs as well as in lighter hog weights as producers seek to limit their input costs by feeding less corn.

 

Based on trends in recent years, a rise in corn prices of US$1.50 per bushel would project a reduction in hog production of around 5 percent to 6 percent.

 

On top of that disease concerns such as circovirus losses are also hurting pig farmers.

 

Porcine circovirus disease is a wasting disease that affects growing pigs. However, recently developed vaccines are now being used by some producers and are reportedly reducing losses.

 

Mike Zuzolo, analyst with Risk Management Commodities in Lafayette, Ind., said if corn futures prices stay within a range of US$3.50 to US$4 per bushel, hog production would likely be unaffected, especially within the vertically-integrated sector.

 

But if corn prices rise beyond that, there could be significant liquidation.

 

Last week, prices were within a whisker of reaching US$4. Most-active CBOT March corn closed at US$3.96 1/2 a bushel, and all contracts are again higher Tuesday.

 

Steady or firm corn prices would result in lighter hog weights, and this will keep supplies more current, reducing the need for herd liquidation, Zuzolo said.