December 14, 2009

 

 

US hog producers aren't likely to make the kind of big cuts to their herds that many industry experts say are still needed to ensure their viability.

 

Confronted in recent years with big losses and deteriorating financial positions, some hog producers have already dramatically scaled back their herds. A variety of factors, including an improving outlook for pork prices in recent weeks, is providing a disincentive for producers to scale back further.

 

The debate over the need for more cuts came into sharp focus this week when Larry Pope, chief executive of the nation's largest hog and pork producer, Smithfield Foods Inc., said the industry needs to cut at least an additional 3%--and maybe up to 5%--to maintain pricing power. Smithfield has already reduced its herd by 13%--taking 100,000 sows out of production--during the past 18 months.

 

"We believe further [herd] liquidation is needed to reach a balance in supply and demand," Pope said Thursday during a conference call after the company reported a US$26.4 million quarterly loss, largely owing to weakness in its hog production business.

 

Glenn Grimes, agricultural economist at the University of Missouri, said slaughter data show that herd liquidation has slowed dramatically and possibly has stopped in recent weeks. The data showed the steeper pace of herd reduction slowed in early October when hog prices began to rebound.

 

Grimes said that while a further reduction of 3% to 5% is probably needed, a smaller cutback in the area of 1% to 2% is more likely given the current level of demand for pork.

 

Rich Nelson, director of research with Allendale Inc. in McHenry, Ill., said hog producers aren't likely to cut more than 1% to 1.5%. He noted that both large corporate operations as well as many of the individually owned farms liquidated a portion of their herds from late 2008 through early fall of this year. In general, he added, the independent producers do not intend to reduce their herds any further in late 2009 through 2010.

 

Grimes notes that most of the independent producers with less than 50,000 head marketed annually grow most if not all of the corn they feed to the hogs. The grain production helps them cushion the losses that occur in their hog operations, he said.

 

Meantime, premiums in lean hog futures prices are encouraging producers to not liquidate additional sows. Producers can lock in break-even to modest profits through futures hedges for the late spring and summer months in 2010, the analysts said.

 

Smaller cutbacks in the breeding herd could mean that prices might not rebound as much as producers have hoped for or the futures markets have anticipated. Grimes said a boost in demand would be needed to absorb the additional pork.

 

US hog producers collectively have lost an estimated $5.4 billion since late summer 2007, according to the National Pork Producers Council. A combination of record high grain prices hit in the summer of 2008 and the economic crisis later in the year hurt producers' net returns. Another blow to profitability came in April this year with the discovery of the novel AH1N1 influenza, originally called swine flu, which hindered demand. To compound matters, a seasonal spring-summer rally in hog prices that producers had been counting on to secure a profit did not materialize this year.