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U. S. Hog Sector Cuts Losses, But Recovery Far Off

U. S. hog prices have bounded higher in recent months, an unusual development for this time of year, narrowing losses for cash-strapped producers.

But it will be several more months before the U. S. hog sector, which has lost money for nearly two years, sees regular profits and even longer before it fully recovers.

Stronger pork sales both at home and abroad have lifted prices, along with a slight decline in production.

“The rally that started in August has been stronger than most of us had anticipated,” said John Lawrence, agriculture economist at Iowa State University. “I think it was unexpected that the December (futures) had gotten this close to break even.”

The Chicago Mercantile Exchange December hog futures expired on Dec. 14 at 64.575 cents per lb., up 0.575 cent for the day, and peaked that day at a six-month high of 64.600 cents.

That price may stop losses for a few producers, but Lawrence estimates most will need about 70 cents per lb. in December on average to break even.

Currently, the CME’s February contract is at 66.20 cents.

RECOVERY MONTHS AWAY

Widespread profits on hogs are months away, with producers still feeding their livestock $4-per-bushel corn while the sluggish global economy hits meat sales.

“I don’t look for a producer to make a profit in January, February, or March,” said Ron Plain, economist at the University of Missouri. “We (producers) are going to go broke a lot slower than has been happening for some time, but I still think we are going to be in red ink.”

Plain said he expected regular profits from May to August due to fewer hogs and higher prices.

Larry Pope, chief executive at Smithfield Foods Inc., said 2010 should produce profits on hogs, but it will be several years before those profits return to normalized levels.

That comment on an earnings conference call last Dec. 10 sparked selling in Smithfield’s shares that day even though quarterly results came in stronger than expected.

Smithfield, the largest U. S. hog producer, has reduced its herd by 13 per cent. Pope said the U. S. herd needs to shrink another three per cent to five per cent.

Plain predicts it may be 2012 before producers see solid profits on hogs.

“Better days are coming, but the really wonderful days I am afraid are going to have to wait until this recession is history,” he said.

Plain cautioned that producers could derail any recovery if they refill empty barns in anticipation of better profits.

“One of the things that worries me, is how quickly we might start to refill buildings once we do start making money,” said Plain. “Rather than going from a little black to a lot of black we are likely to stay around that break-even level.”

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