Record-high feed costs caused by the worst drought in half a century are forcing farmers to slaughter more of their hogs, with the number reaching 9.9 million head in August, the highest-ever for that month, data analyzed by Reuters showed.
The U.S. Department of Agriculture will not issue its August monthly tally until next month, but its daily slaughter data after revisions shows that 9.857 million head were killed in August, the most since 9.868 million in December 2011.
With the pace of slaughter set to increase seasonally in the fourth quarter, the country is going to be awash with pork, and prices of hog futures at the Chicago Mercantile Exchange, which are hovering around 20-month lows, could go lower.
"If we continue to go seasonally higher (slaughter) from here, as we normally do in the fourth quarter, this is going to
be a much larger number than anticipated and we’ve got a wreck on our hands," said Jim Robb, director of the Livestock Marketing Information Center in Denver.
"Feedstuff costs are high and hog prices are headed lower," said Robb, whose agency provides economic analyses and market projections to its members, including government agencies.
The livestock sector was hammered by the surge in grain prices to record highs in the aftermath of the drought, which has devastated the corn and soybean crops, scorched pasture and caused the price of hay to more than double.
Analysts said producers also pushed more hogs to slaughter because of cooler weather — after the sweltering heat of July — helping hogs to gain weight faster.
USDA weekly average weight data showed hogs in the benchmark Iowa/southern Minnesota market for Aug. 25 at 268.6 pounds. It was 3.1 lbs. more than the week of July 28 and 5.1 lbs. higher than during the same period last year.
Robb also pointed out that the conception rates of sows are better in the first half of the year due to weather conditions, resulting in more hogs coming to market in the second half.
On Tuesday, the average price of hogs in the Iowa/southern Minnesota market slid to $70.75 per hundredweight (cwt) after starting the month at $91.49, according to USDA data (all figures US$).
The surge in hog and pork supplies hurt the earnings of Smithfield Foods, the world’s largest pork and hog producer, with its quarterly profits falling short of analysts’ expectations.
"On the operating side, our results reflect the ongoing turmoil in all protein and grain based businesses today, high volatility and increasing cost of production primarily tied to higher grain costs," Smithfield CEO Larry Pope told analysts on a conference call.
He characterized third-quarter pork results as "disappointing," citing the usual slowdown in fresh pork demand during the summer months.
How to stem the tide of losses incurred by hog producers will be the main focus of the U.S. National Pork Board when its meets Wednesday and Thursday in Des Moines.
The board, too, has been affected by the drought as its budget for next year of $67 million will be five per cent smaller than this year’s due to reduced income for its members.
The board collects 0.4 per cent of the sale price of a hog to be used in its various programs, including raising pork consumption.
"We expect to see relatively good market prices for our pigs, but the drought has significantly depleted the corn and soybean crops that are the foundation of hog diets," said NPB president Conley Nelson in a press statement.
— Theopolis Waters writes for Reuters from Chicago.