US pork complex prices above 2008 but producers still hurting

 

 

US hog and wholesale pork prices are up more than 20% from a year ago in the final week of 2009, but most swine producers are still losing money at the current market prices.

 

Producers have helped themselves by reducing their breeding herds, but even deeper culling of sows is needed to pull down pork supplies more and push prices higher still for them to make a profit on a sustained basis. Some analysts predict that unless further liquidation of the herd occurs, most producers could lose money again in 2010.

 

A fourth-quarter rally in pork and hog prices has brought much needed relief to producers. According to the National Pork Producers Council, losses have been more than US$23 a head marketed over the past 28 months for a combined total of more than US$5.4 billion.

 

The USDA's wholesale pork quote Monday was at US$68.61 per hundred pounds, 25% higher than at this time last year. Cash hog prices in the past week have averaged about 20% above a year ago, based on the USDA's reports and the Chicago Mercantile Exchange's two-day lean hog index.

 

The pork carcass composite value in mid-August was less than 60% of a year ago and hit a 6 1/2-year low at US$51.33. Pork prices rebounded modestly in September and October then moved above a year ago in early November.

 

Reduced supplies of slaughter hogs, improved export sales from this summer and stabilisation in the economy contributed to further price advances in the latest two months.

 

The latest break-even price for hog producers as calculated by John Lawrence, agricultural economist at Iowa State University, is around US$52 per hundred pounds on a live basis. This converts to a dressed break-even price of about US$70. The latest CME lean-hog index was US$62.47, representing a loss of about US$7.50 per hundred pounds of carcass or approximately US$15 a head. In mid-August, producer losses were running around US$40 a head.

 

Dow Jones Newswires' daily packer margin index report shows an estimated margin for vertically integrated plants that produce most or all of the hogs they process. In the latest week, the calculated index ranged from slightly positive some days to minus US$1.50 a head, but that was a drastic improvement from the figures seen in mid-August from minus US$30 to minus US$35 a head.

 

The advances in hog and pork prices have also allowed the vertically integrated pork producers-processors such as Smithfield Foods and Seaboard Foods to trim their heavy losses in hog production. Their stock prices reflect an improved outlook as well. In mid-August, Smithfield's stock was trading under US$12 a share and is now near $16. Seaboard's stock is up about 22% from mid-August. Smithfield Foods is the nation's largest hog producer and pork processor.

 

The margin index does not include value-added processing such as smoked meats, sausage products or export sales.

 

Smithfield has reduced its hog herd by 13% during the past 18 months. Larry Pope, Smithfield Foods' chief executive, said in early December that the industry needs to further reduce the sow herd by 3% to as much as 5% in order to bring supplies in balance with demand and result in profitable prices for producers.

 

"Hog prices are improving and hog-raising costs have trended downward, although still historically high," Pope said in the company's latest quarterly results release issued December 10.

 

"Our restructuring plan is working and our cost structure is steadily improving. Looking forward to the second half of fiscal 2010, we expect the company to be profitable," he said.