Raising pigs used to be lucrative. When corn was just $2 a bushel, it cost little to feed them up. And the more corn they were fed from ‘farrow to finish’ (birth to sale), the heavier they got, and the more money you got for your hog.
All that changed in 2006 when American corn started being diverted on a massive scale to Midwestern ethanol plants. As the corn price rose fourfold to $8 a bushel, it suddenly cost $150 to fatten a hog. But with plenty of fattened pigs coming to market, meatpackers were only paying $100 a hog. Farmers reacted by farrowing fewer pigs. And finishers started slaughtering sows instead of selling them onto breeders to start the next generation. The situation got so desperate that farmers even started killing their piglets to use as compost.
Even so, in August last year we said that it would take seven months to work through the excess of swine. But then the price of pig livestock would jump as the demand outstripped supply.
And five months later, the pig shortage is beginning to make itself felt. According to the latest US Department for Agriculture (USDA) quarterly hog and pigs report, December saw 1.25 million fewer hogs weighing less than 60lbs being produced than for the same month last year. As Jim Long of Genesus Genetics explains, the US will import 25,000 fewer hogs a week from the Canadian market. So by April there will still be at least 6% fewer available to the US market year on year. That will translate into a 20% jump in lean hog prices between now and May, says Long. Meanwhile, US demand for pork is not about to tumble. Cheaper than chicken and beef, Americans won’t let the ugly economic climate spoil their appetites. And the average American will eat 50.2 pounds of meat in 2009, up 1.8% from last year, according to the USDA.”The global meat decline is a reality – (we are witnessing) a scenario not seen for two generations.”
But the jump in the price of pig livestock is only half the story. There’s also China’s demand for pork meat. The Chinese have a formidable appetite for pork and their farmers fall a long way short of satisfying it. So China’s imports of pork meat jumped a staggering 470% from January to October last year, according to Dow Jones. US and European exports serviced 88.8% of that jump, with imports from the US alone jumping 820%. This rate of increase won’t continue forever. But with outbreaks of blue-ear disease – a reproductive and respiratory illness that killed 70,000 animals in China in 2007 – devastating pig populations, there’s money to be made by US producers exporting pork to China particularly now that global shipping costs have dropped off.
And the disease problem will only get worse. Peasant farmers account for 70% of hog production in China, but with many leaving the countryside for jobs in the cities, the government has been setting up factory farms similar to those in the US. That will stop the supply of hogs falling, but with polluted water and overcrowded hog sheds, controlling disease will remain a huge challenge.
Life still isn’t easy for US pig producers. Smithfield Foods, for example, plans to reduce its hog-breeding herd by 7% this year and most US producers won’t return to profitability until next year, Dave Bauer of Brite Futures told Bloomberg. So better to buy pig livestock and Chinese producers instead. We have a look at the best way to do both in the box below.
The best bets in the sector
The easiest and cheapest way to play escalating pork prices is through a hogs exchange-traded fund. For example, the London-listed Lean Hogs ETF (HOGS) tracks the prices of futures contracts for pigs on the Chicago Mercantile Exchange. When choosing ETFs, note that ‘live hogs’ refers to the pigs sold at market whereas ‘lean hogs’ to the more liquid contracts traded on a futures exchange. And the fall-off in supply means that lean hogs will start to escalate in the coming months – with Central States Commodities president Jason Britt predicting a 46% jump in hog prices between now and June.
For an attractive play on China’s demand for pork, Chinese producer Zhongpin (Nasdaq: HOGS) still looks a good bet. Zhongpin is one of China’s biggest meat packing and distribution companies. And this is a market that the US Department of Agriculture estimates to be worth $32bn annually. Zhongpin has grown very solidly, beating Wall Street’s estimates by 13% for each of the last three quarters, notes Bill Wilton on Zacks. Its full year earnings per share are estimated to be $1.49 in 2009, showing a projected growth rate of 25% on last year. It trades on a forward p/e of just 5.9.