Pork problem

Source:Reuters Published: 2015-2-10 19:18:01

Prices fall sharply amid rise in supply, demand slide

US farmers have been raising pigs in increasing numbers recently, but the rise in supply comes at a time of falling demand from China. Prices have fallen sharply, and farmers in both the US and China are feeling the pinch.

Photo: IC

For decades, Chuck Souder relied on corn and soybeans to keep his 400-acre Iowa farm running, but with corn selling for half its price two years ago and soybeans slumping, Souder has shifted to what he hopes will be a more profitable crop: pigs.

Souder spent $850,000 in 2014 to build a wean-to-finish barn, which can house nearly 2,500 animals at a time.

He is not alone.

Since 2013, Iowa farmers have filed nearly 700 construction applications for new or expanded hog buildings, a sixfold increase from five years earlier, records show.

Minnesota, Missouri, Illinois and other states are seeing a similar surge, said state agriculture officials.

But farmers are finding that their gleaming new barns have had an unintended consequence, contributing to a glut of hogs that has sent pork prices to their lowest levels in years.

Pork futures hit a four-year low in the first week of February. A strong dollar has made US pork more costly than meat from competing countries, which has led to a slowdown in exports, especially to China. And cargo slowdowns due to a labor dispute at West Coast ports has left stocks of pork products piling up.

Pork prices followed beef prices to record high levels in 2014, as the cattle herd shrank and a swine virus diminished the US hog herd. Pork prices have since fallen, but US consumers who had switched to chicken are not yet returning to "the other white meat," say retail food analysts.

Boneless pork loin prices have fallen more than 15 percent at retailers in the past two months alone, and the US Department of Agriculture last month predicted US pork prices will drop 17.5 percent overall this year.

"Now that pork prices are collapsing, this could make pork more competitive," said Jared Koerten, senior foods analyst with research firm Euromonitor International. "The question is, will people switch back from chicken to pork?"

Construction craze

The hog barn boom in rural America began as meat packers like Tyson Foods Inc, Seaboard Foods, JBS USA and Cargill Inc pushed farmers to rebuild quickly after the deadly Porcine Epidemic Diarrhea virus killed an estimated 8.5 million piglets in 27 states.

The building boom has facilitated a surge in the US hog and pig herd, which has rebounded from an eight-year low of 65.1 million in September 2014 to 66.1 million as of December, according to Agriculture Department data. The agency expects pork production to increase by 4.6 percent in 2015 over 2014.

Pig farmers, meanwhile, could be facing declining margins and rising debt payments in the years to come.

"When times get tough, and they will in the next two or three years, that's when you'll see some of the farmers being tested," said Will Sawyer, a protein analyst with Rabobank.

The supply and pricing volatility are raising questions, too, about Tyson Foods' move in 2014 to acquire Hillshire Brands. Caught in a bidding competition with rival Pilgrim's Pride, Tyson paid $8.55 billion, or nearly 17 times Hillshire's earnings before interest, tax, depreciation and amortization (EBITDA).

In the food sector, companies typically sell for between 10 and 15 times EBITDA, said Brian Weddington, a vice president of Moody's Investors Service's corporate finance group.

Industry analysts warn the $5.75 billion Tyson borrowed to partially fund the deal could weigh heavily on the company if margins in the pork sector remain too low.

In response to analyst questions about the deal during an earnings call late January, Tyson CEO Donnie Smith said the higher hog supply and lowering prices should help margins, particularly in its prepared-foods business, which grew enormously with the Hillshire acquisition.

Export squeeze

The fall in US pork prices is occurring amid an unexpectedly sharp fall in demand from China, a large US export market. US pork exports to China in 2014 were down 34 percent from a year earlier, as high US prices sent Chinese buyers to lower-priced suppliers from Europe.

Many meat packers also curtailed their pork exports to China because of the livestock drug ractopamine, a growth stimulant US hog farmers use to add animal weight before slaughter.

China bars shipments from at least 25 US pork plants over ractopamine issues, said Joel Haggard, Asia-Pacific director of the US Meat Export Federation.

Domestic Chinese factors also are at play. The country's economic slowdown has contributed to a 9 percent decrease in demand for pork, according to swine-industry research firm soozhu.com.

Meanwhile, Chinese hog production is on the rise, with 735 million pigs raised for slaughter, up 2.7 percent over 2013, according to Feng Yonghui, general manager at soozhu.com.

There are signs China's hog boom may have overheated, with producers losing money for 13 months in a row.

In the US, farmers like Souder are still hoping for the best.

"I have faith this will be good for our family and our farm," he said. "We have six to seven years to pay everything off."


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