July 18, 2009

 

 

US livestock producers may be cheering over the abundance of lower-priced corn, but analysts are worried that producers may be hurt in the long term as it could boost meat production amid declining demand.

 

Since last year, corn prices have dropped by more than half to about US$3.20 per bushel, which have significantly reduced the financial strain on livestock producers who have lost huge amounts of money in the past year from high feed costs and sluggish meat sales.

 

Chicken producers just recently turned profitable due to production cuts earlier this year, but cattle and hogs are still losing money.

 

Analysts are worried that the rapid decline in feed prices may cause producers to slow or halt herd and flock reductions which are needed to bring down meat supplies at a time when recession are impacting sales.

 

The drop in demand has more than offset the benefits of the lower feed costs, said Rich Nelsen, an analyst at Allendale Inc.

 

In addition to slower domestic meat sales, exports have also slowed. The USDA estimates beef exports this year to drop eight percent, pork exports down 10 percent and chicken exports down nearly eight percent.

 

Meanwhile, buyers such as China and Russia are working to increase their meat production, which indicates they will buy less from the US.

 

At the same time, US beef and pork production are each expected to drop one percent, and chicken down four percent.

 

Kenneth Zaslow, food analyst at BMO Capital Markets, said they would prefer higher corn prices to ensure that the severe hog production losses would create bankruptcies in the hog industry and a meaningful hog liquidation that would produce years of strong profitability.

 

Steve Meyer, an economist with Paragon Economics, said the US hog herd needs to shrink about six percent from current levels to put production in line with demand.

 

Some large hog producers have reduced herds, but analysts are worried that the lower feed costs will have small and medium-sized producers resisting further reductions.

 

Smithfield Foods and Tyson Foods have announced they would cut their hog-breeding herd by 13 percent and by nearly 30 percent, respectively. Because these reductions are in the breeding herds, it will be next year before they will result in fewer market hogs.