(Corrects name of futures exchange in 3rd paragraph to Chicago
Mercantile Exchange from Chicago Board of Trade)
By Karl Plume and Theopolis Waters
CHICAGO, Aug 17 (Reuters) - Two years after a devastating
swine virus killed nearly 10 percent of U.S. hogs, farmers who
built up herds to compensate are faced with a sober realization:
they've produced too much bacon.
The aggressive ramp-up in hog production after the Porcine
Epidemic Diarrhea virus (PEDv) outbreak in 2013, which brought
record profits for those whose pigs survived, has now created
the greatest U.S. hog price collapse since the late 1990s. That
was when overproduction sent prices plunging 75 percent to
50-year lows.
Benchmark lean hog futures prices on the Chicago Mercantile
Exchange have dropped 42 percent from their July 2014 record
high of $133 per hundredweight (cwt).
And as herds continue to grow, and the strong dollar and
competition from Europe and Canada blunts export demand, hog
farmers are probably facing even lower prices in the months
ahead, with December-delivery futures trading about 20 percent
below current prices. The hog glut spells more trouble for a
U.S. farm economy already struggling with the lowest grain
prices in five years.
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Graphic showing pork and beef prices in recent years:
http://link.reuters.com/gem35w
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La Mars, Iowa-based Tentinger Farms, which sells hogs to
Tyson Foods (NYSE:TSN) TSN.N , expanded its herd by about 20 percent to
cash in on high hog prices and cheap feed costs, but record
returns have eroded.
"Things are not real rosy out here. We're spending a lot of
money and touching a lot of bases, handling and feeding more
pigs, and not really making any money," owner Bill Tentinger
said.
"Once we get past 2016, I think things are going to perk up
a little bit ... but it's not going to be gangbusters rolling
ahead," he added.
With retail prices now at three-year lows, pork is stealing
market share from other proteins: U.S. pork sales in June were
up 12.5 percent over the previous month, while chicken rose 3
percent and beef fell 2.2 percent, according to the most recent
industry data.
The number of piglets per litter hit a record high of around
10 in the spring, according to the U.S. Department of
Agriculture (USDA), helped by steadily improving use of genetics
and selective breeding. These animals take around six months to
make their way to the meat case.
And when cooler autumn weather arrives and sweet, freshly
harvested corn begins filling feed troughs, reviving pig
appetites, weights should climb back up to pre-summer levels.
MORE PIGS COMING
The boom started when farmers who had lost millions of pigs
to PEDv took advantage of cheap feed to plump up their hogs.
Meat processors such as Cargill Inc CARG.UL and Smithfield
Foods Inc SFII.UL were paying premiums for the extra weight.
As vaccines and strict bio-security measures brought the
virus under control, hog numbers exploded.
Some hog producers are still expanding as they reinvest last
year's record profits. Construction permit applications for new
and expanded swine buildings in Iowa, the top producing state
where hogs outnumber people more than six to one, had nearly
reached the 2014 total by mid-2015, according to state data.
Tyson Foods CEO Donnie Smith said in a recent conference
call with analysts that he expects the domestic expansion to
continue into 2016 resulting in 3 to 4 percent more hogs and
pork on the domestic market.
Managing such boom-bust cycles has long been a challenge for
the farming economy, where unpredictable weather, a shift in
consumer diets or cooling export markets can mean the difference
between fortune and failure.
In the late 1990s, farmers were being paid such low prices
for their hogs that they lost money on each animal sold. Many
small hog farmers went out of business.
This time around, the stuffed supply chain has prompted some
U.S. grocers and fast food franchises to promote pork.
Midwest supermarket operator Roundy's has offers including
38 percent off pork tenderloin at Mariano's stores and a third
off packages of bacon at its Pick 'n Save locations.
"Roundy's has been taking advantage of deals on pork and we
have been promoting it more in the past few months, and it will
continue," its spokesman James Hyland said.
Retail advertisements featuring pork offers from grocery
stores jumped 16 percent in June over a year ago, the National
Pork Board says. Billboards in U.S. cities splash Burger King's
QSR.TO "Extra Long Pulled Pork" sandwich and Wendy's WEN.O
Baconator fries.
WEATHERING THE DOWNTURN
But in the country that claims to have invented the ground
beef hamburger and produced McDonald's, pork demand will remain
largely tied to price, experts say.
"It's hard to say if pork can retain that market share. It's
very much price driven in all three commodities - pork, beef and
chicken," said William Slabaugh, research analyst at Stephens
Inc, an independent financial services company.
An expanding cattle herd is expected to bring down beef
prices, but whether prices fall enough to recapture lost market
share may hinge on hard-to-forecast elements such as grazing
pasture conditions and grain costs.
There is some impact from health concerns or diet fads that
has seen beef in particular losing out to chicken - but a lot of
that may have already played out.
Annual beef consumption has steadily fallen to around 54-55
pounds per capita now from 67.5 pounds in 2000 while chicken
consumption climbed 18 percent to 91.4 pounds per person,
according to USDA data.
In contrast, people have been eating around 50 pounds of
pork per year throughout the period.
"People started eating more chicken as of 15 years ago...
But in general, the trends don't change a ton. It's more what
gets pushed is what's cheaper," Slabaugh said.
For now at least, low prices are likely to boost demand for
bacon, pork and sausages into the autumn.
"Anybody that wants to cook pork at home is going to have a
great summer," said Will Sawyer, an analyst with Rabobank.