A USDA feedlot cattle report showed 10.45 million cattle were being fattened for slaughter on July 1, a four-year high for that date and up 3.8 per cent from a year ago.

“The bigger supply now means a smaller supply later. It means fewer cattle in 2012,” Don Roose, analyst with U.S. Commodities Inc said after viewing Friday’s reports.

Feedlots are filled with cattle because a drought in the southwest has killed pasture, leaving ranchers few options other than to fatten the animals for slaughter.

USDA reported 1.695 million head cattle were placed in feedlots in June — up 4.2 per cent from a year ago and the largest June placements since 2006.

More cattle in feedlots means fewer to be put in breeding herds. As a result the cattle herd will keep shrinking, resulting in fewer cattle and less beef next year and in years to come.

In a separate report, USDA confirmed that trend. It said the U.S. cattle inventory, which includes all cattle inside and outside of feedlots plus calves and dairy cattle, was 100 million head, down 1 per cent from 2010 and the smallest July 1 herd since mid-year records began in 1973.

For traders of cattle futures, the inventory numbers were bearish in the short term, but still showed the herd was shrinking.

“We will see a sharp decline in beef supplies for the next three years,” said Rich Nelson, analyst at Allendale Inc.

Frequent droughts in the southwest, high feed costs, a decrease in domestic beef consumption, and cultivation of pasture land for crops have all contributed to this decline.

The smaller herd is at a time when global demand for U.S. beef is strong. Japan, Russia, South Korea and a number of other countries are buying U.S. beef because of better economies and smaller supplies among rival beef producers, analysts said.

U.S. beef export sales are up 35 per cent year-to-date at near 532,000 tonnes.

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With global demand for food growing quickly and production land limited or even shrinking, pressures are mounting to produce more with the same or less throughout agriculture.

Hog producers are facing high feed costs and opposition to new barns from neighbours worried about bad smells and possible pollution.

These factors have prompted producers to boost the size of litters. If a sow, or mother pig, has a bigger litter, the same amount of feed will ultimately produce more pork, and there is no need to build new barns for extra sows.

U.S. pig litters set a record this spring of 10 pigs per sow and experts forecast that could reach 13 in the next five to 10 years, a 30 per cent increase.

In the past, producers enlarged their herds by adding sows. That has meant increased costs for feed and barn space.

Larger litters are being achieved by mating hogs with high birth rates with those known for the tender, tasty pork that consumers want.

“The litter improvement is coming from crossbreeding a Yorkshire and a Landrace,” Craig Rowles, general managing partner of Elite Pork Partnership, said of the sow genetics.

Elite Pork is an 8,000-sow operation in Carroll, Iowa, in which the baby pigs are weaned and fed to maturity.

The boar, often determines the meat quality. Rowles said the Duroc breed is a common sire.

A sow can have up to 14 pigs per litter, but can only nurse 12. As a result, producers either hand feed the “extra” piglets or place them with other sows that are nursing less than 12.

“What we want to do is minimize the number of sows. Sows are where the work is, sows are where the cost is,” said Ron Plain, agricultural economist at the University of Missouri.

Despite the improvement, the United States lags in pigs per litter. Denmark, a major pork producer with much less land than the United States, is achieving 12 pigs per litter.

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The Chicago Mercantile Exchange shut down the frozen pork belly futures market at the end of business on Friday, July 15.

The closing had been expected. Trading in pork belly futures had dropped to zero in recent years after the meat industry became integrated and used fresh pork bellies instead of frozen ones to make bacon.

The contract started trading in 1961 and was the oldest existing CME livestock futures contract.

Pork bellies, as the name indicates, are cuts of pork that come from the underside of the hog and are made into bacon.

Because pork production peaks in the autumn, the frozen pork belly contract was created as a way to give pork companies a means to cover the cost of storing, or freezing, pork bellies until the following summer when they were thawed and processed into bacon, said longtime Chicago trader Bob Short.

Pork bellies had their heyday in the late 1960s and 1970s, when they were the CME’s most popular agriculture contract.

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The Chicago Mercantile Exchange shut down the frozen pork belly futures market at the end of business on Friday, July 15.

The closing had been expected. Trading in pork belly futures had dropped to zero in recent years after the meat industry became integrated and used fresh pork bellies instead of frozen ones to make bacon.

The contract started trading in 1961 and was the oldest existing CME livestock futures contract.

Pork bellies, as the name indicates, are cuts of pork that come from the underside of the hog and are made into bacon. Demand for pork bellies and bacon increases in the summer when tomatoes ripen and people make bacon-lettuce-tomato sandwiches.

Because pork production peaks in the autumn, the frozen pork belly contract was created as a way to give pork companies a means to cover the cost of storing, or freezing, pork bellies until the following summer when they were thawed and processed into bacon, said long-time Chicago trader Bob Short,

“The name sounded attractive. Nobody knew it was bacon. It made people laugh,” Short said.   “We primarily traded the pork belly market until about five to seven years ago when there was then no one to trade with, so we quit,” he said.

Pork bellies had their heyday in the late 1960s and 1970s, when they were the CME’s most popular agriculture contract

“The glamour market was the pork bellies. There was a mystique about it, maybe it was the name,” said Harvey Paffenroth, who has been at the CME since 1968.

He worked summers for his uncle Vincent Kosuga starting in 1968 and in 1971 became a CME member.

“That was probably biggest traded commodity at the floor of the CME. They had potatoes, eggs, cattle and hogs. Cattle was a pretty good-sized contract but it wasn’t as big as the pork bellies,” said Paffenroth.

Stand-up comedians of the 1960s, ’70s and ’80s were quick to latch on to the pork belly contract whenever they joked about financial markets.

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The U.S. Department of Agriculture’s quarterly hogs and pigs report showed that there was a slight increase in the herd size from a year ago, due to more piglets surviving to maturity.

“Despite making money on the hogs, producers were respectful of historically high corn prices and did not expand,” said Don Roose, analyst with Iowa-based U.S. Commodities.

Jim Clarkson, analyst at Chicago-based A&A Trading, said, “The profitability is not there. I don’t hear of any expansion.”

The USDA report showed 10.03 million baby pigs survived, up 2.3 per cent from a year ago, to put the total hog herd on June 1 at 65 million head, or 100.6 per cent of a year earlier.

“This tells us that the industry is making strides in efficiency with respect to a 10-pigs-per-litter result, which is the first time that’s happened,” said Dan Vaught, owner of Vaught Futures Insights.

The breeding herd in the report was 5.803 million head, or 100.3 per cent of a year ago, and the market hog supply was 59.197 million, or 100.6 per cent of a year ago. Those were up slightly from trade estimates.

“We’re still going to have adequate pork supplies around for domestic and export use,” said Roose.

HIGH FEED COSTS

Hog prices of $65 to $70 per cwt were common during the quarter and were higher than a year ago to earn producers profits of $12 per head or more, analysts said.

However, worries about high feed costs and a shaky economy had producers tending the hogs they had rather than adding more.

“The $30 per head profits that they were banking on largely did not materialize, because of high corn prices and disappointing grilling demand,” Allendale Inc. analyst Rich Nelson said.

Pork exports were the key driver in this year’s higher hog and pork markets. But, domestic meat sales struggled, hurt by a cool, wet spring that curbed outdoor grilling and by a shaky economy that included nine per cent unemployment .

The slowdown in domestic sales was blamed for 22 per cent more pork sitting in storage in May than a year ago.

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Historically, chicken dark meat – long shunned by U.S. consumers in favour of white meat chicken breast – has largely been exported by U.S. chicken companies.

China and Russia, which two years ago bought more than a third of U.S. chicken exports, are buying fewer and fewer chicken legs and thighs.

Russia has slowed purchases as it works to expand domestic production, while China has bought less due to anti-dumping duties on U.S. chicken.

Year-to-date U.S. chicken exports are above a year ago, but may slow later with USDA estimating annual exports down 5.5 per cent from 2010.

Now, the low-priced meat may be an easy sell with

FOOD STAMP USERS

“If you are eating on food stamps, leg quarters look like a pretty good buy,” said Paul Aho, economist at Poultry Perspective. “We still have nine per cent unemployment. It will be interesting to see, larger discount than if we had exports, because we are overwhelming the domestic market,” said Jim Robb, economist at the Livestock Marketing Information Center which provides economic analysis to the livestock industry.

While a drop in chicken exports has motivated this shift to domestic markets, demand pat terns for dark meat chicken are changing in the United States.

Altin Kalo, analyst at Steiner Consulting, said dark meat is a favourite in U.S. Hispanic and Asian communities that are growing rapidly.

“Except in the U.S. and Europe, dark meat is the preferred meat worldwide,” he said.

———

“ExceptintheU.S. andEurope,dark meatisthepreferred meatworldwide.”

ALTIN KALO

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It is the first indication that the cattle herd was going through an expansion after the financial crisis of 2008 and the ensuing global recession hurt the livestock industry.

“The expansion is just in its infancy,” Bill Donald, president of the National Cattlemen’s Beef Association told Reuters in an interview. “I have talked to ranchers all over the country and they are going to be retaining heifers.”

Herd expansion involves retaining heifers for breeding rather than fattening them for slaughterhouses.

Getting the credit (loans) to expand remains a concern. As the cost of raising cattle has increased, lenders are requiring producers put up more capital per animal, he said.

The cattle herd has shrunk from a record high of 132 million head in 1975 to 92.6 million this year, a 30 per cent drop. Initially, the decline was due to consumers shifting to chicken as the poultry industry launched a number of quick-to-fix products that took the beef industry years to match.

Later, production was crimped by lost export business due to mad cow disease, a drought in the southern Plains, high feed costs, and more recently a recession.

Now, after years of weakness, cattle prices are the highest ever, producers are making money, and beef exports are surging. Cattle headed for slaughter have traded at $120 to $121 per 100 lbs. in Texas and Kansas, versus $96 to $97 a year ago.

Donald also is a Montana rancher and has begun expanding his herd.

“We have heifer retention in our operation up 30 per cent from a year ago because we saw this opportunity coming,” said Donald. “We are looking at others ways to expand. We are looking at leasing more land.”

The United States is third-largest beef exporter by volume behind Brazil and Australia, with 2.3 billion lbs. in 2010.

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Rival Tyson Foods Inc. is replacing freezers with more efficient models, streamlining production, and reducing product movement between plants to help offset feed costs.

U.S. chickens consume more than 1.2 billion bushels of corn a year, or about 10 per cent of the U.S. crop, and with corn prices at nearly $7 per bushel, almost double what they were a year ago, that can hurt profits.

Pilgrim’s Pride and Tyson estimate that it will cost each of them about $500 million more annually to feed their chickens.

Pilgrim’s Pride, the No. 2 U.S. chicken producer behind Tyson, initiated a $400-million cost-savings program that includes more efficient production methods, new products, and high-tech blow-dryers in washrooms. Pilgrim’s Pride is majority owned by Brazilian meat company JBS SA.

Pilgrim’s chief executive Bill Lovette was inspired to replace paper towels during a recent plant visit.

“I asked the question, ‘How much money do we spend on paper towels across the enterprise on an annual basis?’ And the answer came back fairly quickly, about $3 million,” he told investors during a webcast presentation on Wednesday at the J.P. Morgan Global Protein Conference.

Lovette found another $17 million in annual savings by recycling shipping pallets.

In an earlier presentation at the conference, Tyson Foods’ chief operating officer Jim Lochner said $7 corn may be here to stay.

Corn prices have increased because more of the grain is exported and used to make ethanol.

The companies also are quick to snap up corn when prices drop.

Tyson bought more when corn futures fell nearly nine per cent to about $6.20 at the Chicago Board of Trade in the days after the March 11 Japanese earthquake.

“We did use that in a conservative fashion to extend our coverage into our Q4, which is the July, August, September period,” Lochner said of the corn purchases.

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U.S. hog producers are not expanding herds as worries about high feed costs have them managing what they have, analysts said Friday after a government report showed only a slight increase in hogs.

The U.S. Agriculture Department showed the hog herd as of March 1 at 63.964 million head, up 0.7 per cent from a year ago. But that increase was largely due to better herd management as more young pigs are surviving to maturity.

USDA on Friday put the breeding herd at 5.78 million head, up 0.5 per cent from a year ago, and the market hog supply at nearly 58.185 million, up 0.7 from a year ago. 

While all of those numbers were slightly higher than average trade estimates, analysts were reluctant to predict an end to the recent surge in hog prices because of this year’s strong demand for hogs and pork. USDA forecasts U.S. pork exports to be up more than 10 per cent this year.

Nearby hog futures are nearing record highs at the Chicago Mercantile Exchange and deferred contracts are even higher. 

“It is slightly negative, if anyone cares,” Jim Clarkson, analyst with A+A Trading, said of the report.

Robust pork exports to Mexico, South Korea, Japan and others have had analysts and traders focused on demand rather than supply.

“I think cash fundamentals will rule the day and the expected increase in exports to Japan will outweigh any impact,” Dan Norcini, an independent hog trader, said.

High feed corn prices have discouraged expansion. Corn costs about $6.80 a bushel now and there are worries it could surpass $7 or even $8 should the 2011 corn crop be hurt by production problems (all figures US$).

“Hog producers are waiting for some signal that feed is going to be cheaper before adding any sows,” said Ron Plain, agricultural economist at the University of Missouri.

Plain noted the report forecast a slight decline in pig litters this year versus 2010, which could mean fewer hogs and higher hog prices in 2012.

Chicago hog futures closed at a one month high on Friday at 92.475 cents per lb and are near the record high for a lead contract of 95 cents set in February.

“Numbers were just a little bit heavier than expected as far as upfront supplies. But we would not think this would impact Monday’s trade at all,” said Rich Nelson, analyst at Allendale Inc.

— Additional reporting for Reuters by Michael Hirtzer.

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U.S. cattle and hog futures closed sharply higher Friday and for the week with the April cattle the highest ever for a lead contract on widespread fund buying and short covering.

Both markets have fully recovered the losses incurred shortly after Japan’s March 11 earthquake. In the days after that disaster, cattle futures lost about six per cent of their value and hog futures more than five per cent.

Fund buying pushed the markets to the day’s highs, but it was cash market events that started futures higher.

In cattle, higher cash sales this week in Nebraska, the No. 2 cattle state behind Texas, at $190 per hundredweight (cwt) on a carcass basis triggered buying in futures (all figures US$). As the futures rose short covering and chart-based buy orders were activated.

“If you were short, would you be happy right now?” said one cattle trader explaining the rush by some traders to buy back short positions.

Since the Japanese earthquake, wholesale beef prices rose to their highest since 2003, cash cattle traded higher from Texas to Nebraska, and Japan was back in the market buying U.S. beef.

Also, Japan may need to buy more beef to replace meat that was either spoiled due to power outages or contaminated by the radiation leaks, said Dan Norcini, an independent livestock trader.

The U.S. Department of Agriculture on Thursday reported Japan bought 3,900 tonnes on U.S. beef last week, the largest sale to any country that week.

While beef demand is strong, the supply may decline, which could force cattle prices even higher, traders said. The U.S. cattle herd is the smallest in more than 50 years and feedlot cattle numbers are expected to decrease in the months ahead.

April cattle futures closed up 2.775 cents, or 2.4 per cent, at 118.600 cents per pound and actively traded June was up 2.975 cents, or 2.59 per cent, at 117.750 cents.

April peaked Friday at 118.650 cents per pound, the highest ever for a lead contract.

Feeder cattle moved higher with live cattle with March up 1.100 cents, or 0.84 per cent, at 131.900 cents per pound and April up 2.225 cents, up 1.68 per cent, at 134.850.

Hog futures advanced, with June contract the highest in a month, helped by this week’s higher pork prices and by talk of pork plants needing hogs to maintain production schedules.

Also, a USDA report on Friday showing a $7.37/cwt increase in the average Iowa/Minnesota cash hog price helped push futures higher. Cash and futures traders speculated that jump in cash may reflect a price increase over a few days.

USDA’s Hogs and Pigs Report, released after the close, appeared to have little effect on Friday’s futures trading. The report showed about one per cent more hogs on U.S. farms as of March 1 than a year ago and a breeding herd about unchanged from a year ago.

April hogs closed up 2.150 cents, or 2.27 per cent, at 92.475 cents per pound and June up 2.525 cents, or 2.5 per cent, at 103.700.

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