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Swine flu, recession put US hog industry in the red

Summer is usually a profitable time for America's hog producers but this year swine flu, recession and high feed prices have even the largest farmers operating deep in the red and some smaller ones on the brink of bankruptcy.

Before things get better, the weakest are expected to fail and even those that survive will need years to recover from the debts they have amassed during this lean time.

At farmer Eldon Gould's spread west of Chicago, where he has been raising hogs for 40 years, 750 sows nurse their litters in individual stalls as the 67-year-old farmer tours the barns and inspects the baby pigs.

Once weaned, the pigs will be moved to another farm to be fattened into market hogs. But Gould says it's unlikely the weak market will be faring any better by the time they are ready to be sold.

“It was a combination of the US and global recession. People in the United States are buying less meat in general and I'm sure the same thing is going on globally,” said Gould, who usually produces about 15,000 pigs a year on his Maple Park farm about 50 miles west of Chicago.

Hog prices normally rise and turn profitable in the spring and early summer because of seasonal declines in numbers. That did not happen this year because corn prices remain high and demand for pork has slumped.

For consumers, the losses on hogs will mean higher-priced pork next year because supplies will be down as producers quit or reduce production.

Pork sales have slowed as the recession has penny-pinching consumers eating out less and buying lower-cost items such as hot dogs and lunch meat.

Swine flu also hurt. Even though the virus is spread by humans and not by hogs or pork, the outbreak caused a noticeable drop in pork sales because of consumer fears, economists said.

The Gould farm has cut costs and is operating as efficiently as possible hoping to survive until the market improves, which economists predict will be a year from now.

Some producers may not make it. A few have already filed for bankruptcy and agricultural economists predict more will have to file.

The survivors will struggle because it will take years before debts from this year are paid. That will mean putting off buying new machinery, building new barns or expanding herds.

“It is going to take about five years to crawl out of this hole,” said Gould.

During previous bad times it was the smaller producers who struggled. This time the pain is being felt from the largest to the smallest.

Long-time agriculture economist Glenn Grimes said the industry's financial problems are the worst he has seen in his nearly 60 years in the business.

Smithfield Foods Inc, the largest hog producer in the world, reported its first fiscal year loss in more than 30 years and predicted its hogs will lose money for another six months. It already cut its herd 10 percent and has said it will cut it another 3%.

Producers know the herd needs to shrink. A group of producers tried this spring to raise $50 million to be used to reduce the herd, but that attempt failed due to lack of participation. They would have used the money to buy sows and slaughter them, thus reducing the breeding stock.

In 2008, corn prices climbed to nearly $8 per bushel, pushed up by a combination of demand from ethanol makers and Wall Street investors pouring money into commodities. While the $8 corn did not last, $4 corn remains, which is much higher than the $2.00 to $2.50 that producers are used to paying.

The $4 corn is harmful because hog producers cannot raise hog prices enough to cover the higher-priced feed. Hog prices this year are down about 20% from a year ago and wholesale pork prices are down 28%.

“Our costs to grow these animals is about 10 cents a pound higher than when we had $2.50 corn,” John Prestage, senior vice president of the family owned Prestage Farms, told Reuters. “We have way too large of a (pork) supply to get 10 cents a pound more for hogs.”

North Carolina-based Prestage Farms will reduce its sow herd about 5% this year. Because of breeding cycles it will be next year before that 5% reduction will translate into fewer pigs and less pork.

In addition to shrinking herds, producers are pleading with bankers to maintain lines of credit. The latter has not been easy, because after more than a year of losses many farms have used up their credit and banks are demanding collateral before offering more.

“As a whole, the lending community is becoming increasingly concerned,” said Gould.

For consumers, these hardships will mean higher priced hams, pork chops and other pork next year because there will be fewer hogs and less pork.

“Consumers really have a bargain at the present time,” Grimes said of supermarket pork prices. “That is not going to last, The only way we can pay hog producers more is sell meat to consumers for more.”

Historically, hogs have been a dependable source of farm profits because of increasing demand for pork both here and in export markets such at China, Russia, and Mexico. The profits led to increased production as producers built barns and expanded herds.

The recession has slowed demand for pork, plus China and Russia are buying less as they build their own herds.

Current corn and hog price forecasts indicate it will be June 2010 before hogs are profitable again, said Ron Plain, agricultural economist at the University of Missouri.

Prestage agrees and said that timeline could be particularly hard for new hog producers, who have secured debt to start their businesses.

“If you look at the futures price of hogs and the price of corn right now, there are no profits to be made in hogs until about next June,” said Prestage. “I cannot possibly see how some these newcomers will survive.” (Reuters)