Articles in this document:

· Rabobank Report Predicts Pork Profitability to Return by End of 2009

· Weekly Outlook: Pork Price Boom

Rabobank Report Predicts Pork Profitability to Return by End of 2009

Source: Rabobank America Press Release

Thursday July 17, 2008

NEW YORK, July 17 /PRNewswire/ -- Although higher input prices have kept pork producers in the red for close to nine months, a new Rabobank report, "U.S. Pork," predicts they are likely see profits again in 2009.

"After more than three years of strong profitability, U.S. hog producers have been in the red for the last nine months. It has been suggested that the industry is in the middle of a perfect storm - excess hog supplies, record feed prices and initial concerns regarding the robustness of domestic demand," said Fiona Boal, Executive Director of Rabobank's Food & Agribusiness Research and Advisory (FAR) department.

"While the industry is undoubtedly being forced to adjust to a new, unique, and difficult, operating environment, a 1998-like collapse does not appear likely and those participants with the financial resources and management expertise to survive the next 12 to 18 months should enjoy renewed levels of profitability by the end of 2009," said Boal.

Domestic Demand Remains Solid

U.S. demand for pork is holding up well. The index for consumer-level demand, which is calculated by the University of Missouri, rose 2.5 percent in 2007 and was 0.2 percent higher than one year ago in the first quarter of 2008. Beef demand was down 3 percent and poultry demand up 3.2 percent over the first quarter.

"These figures are consistent with an economy in a recession -- lower beef demand, steady pork demand and higher chicken demand," said Boal. "The 'trading down' phenomenon appears to be at play with consumers shifting their protein expenditure away from beef to less expensive chicken."

However, pork's competitive pricing at the retail level is expected to continue through the summer months. Pork prices will be bolstered by higher chicken prices and will be sustained in the long term by constraints on cattle availability. The pork industry is also less affected by the foodservice sector, which is suffering as consumers reduce their expenditure on meals outside of the home.

Supply

Hog supplies began rising in 2007 following the widespread use of vaccines for porcine circovirus and moderate sow herd expansion. This high supply has led to high slaughter levels. Weekly hog slaughter was the highest in recent history the first 6 months of 2008 - at one point exceeding 2.4 million in a single week. However, numbers could have been even higher.

"The industry should be thankful for the expansion constraint it showed through much of 2005, 2006 and 2007; there could have been even more hogs available today," said Boal. "During this period of industry profitability the U.S. breeding herd increased by a little more than 3 percent, a very modest level of growth compared to past hog expansion phases."

In an initial effort to keep supply in check, sow slaughter levels in the first half of 2008 have been significantly higher than those in the first half of 2007, and should accelerate further. Additionally, smaller operations are shutting down, particularly diversified farms that can rely on grain revenue, while larger producers are being more ruthless in cutting the bottom 10 percent of their herds.

"Given that the industry has only been losing money for the last nine months, a production response this quick is quite remarkable and illustrates the increased level economic realism in the industry and the fact that production decisions are being made by fewer, larger players," said Boal.

Record Input Prices Squeezing Producer Margins

Higher input costs are well documented and are the main cause for the average hog producer to lose as much as $50 a head so far this year. Based on futures prices at the end of June 2008, assuming non-feed costs remain constant, hog producers will not be able to achieve a breakeven scenario until May 2009.

"Assuming that at some point hog and pork prices move higher to compensate for higher production costs, what may be even more concerning over the longer term is the volatility in the grain markets, which - coupled with other elements - would equate to a significant price risk management challenge for all producers and users of grain," said Boal.

Export Demand at Record Levels

"It has been well documented that U.S. pork exports have reached record levels for each of the last 16 years; an impressive feat for any industry. And pork exports are on pace to set new records in 2008," said Boal.

In the first four months of 2008, U.S. pork exports (excluding variety meats) were 52 percent higher than 2007 levels. Totaling more than $1.4 billion so far in 2008, U.S. pork exports could surpass $4 billion for the year. "An explosion in pork exports has undoubtedly helped keep the U.S. industry from diving deeper into the red over the last few months," said Boal.

The premier bank to the global food and agriculture industry, Rabobank is a global financial services leader providing institutional and retail banking and agricultural finance solutions in key markets around the world. From its century-old roots in the Netherlands, Rabobank has grown into one of the 25 largest banks worldwide, with over $800 billion in total assets and operations in over 35 countries. Rabobank is the only private bank in the world with a triple A credit rating from both Standard & Poor's and Moody's, and is ranked among the world's safest banks. In the Americas, Rabobank (www.RabobankAmerica.com) is a leading financial partner to the entire American food and agribusiness industry and is a specialist in sophisticated, customer-driven solutions in the Global Financial Markets and Corporate Finance arenas. Rabobank also provides retail and commercial banking services in California; leasing; and real estate lending, operating loans, input financing and crop insurance to American agricultural producers, input suppliers and agricultural manufacturers.

Source: Rabobank America

biz.yahoo.com

Weekly Outlook: Pork Price Boom

Written by Bob Sampson

The News Bulletin - Illinois

Wednesday, 16 July 2008

Extraordinary losses for pork producers in 2008 may be offset by extraordinary profits in the last half of 2009 and 2010, said a Purdue University Extension marketing specialist.

“This will be especially true if Conservation Reserve Program (CRP) land is relapsed in 2009, if ethanol receives less support, if 2009 weather is favorable, and if crude oil prices don’t keep moving higher,” said Chris Hurt. “There are still plenty of uncertainties, and most won’t feel relieved about ‘better times’ until they arrive.”

Hurt’s comments came as he reviewed the pork market, where he believes the product is dramatically undervalued.

“Pork is cheap in the United States, but it is ‘dirt cheap’ for many of our foreign buyers since the strength of their currencies effectively lowers the price even more,” he said. “Pork is at bargain basement prices when you realize that U.S. producers are producing and selling hogs at huge losses.

“In essence, U.S. producers are providing huge subsidies to U.S. and foreign consumers. Why wouldn’t the world’s pork buyers be banging at our door for these bargains? Why would foreign pork producers want to try to compete with U.S. producers?”

Hurt believes that all this indicates that U.S. pork prices will explode to the upside like other commodities have done. The question is, when?

To understand the situation, Hurt started with cheap domestic pork. Retail prices of pork have averaged $2.85 per pound so far this year compared with $2.87 for 2007. He estimates that pork producers have contributed to the lower pork prices with about $1.4 billion in losses in the first half of 2008 alone.

“The cheap U.S. dollar relative to currencies of other countries with which we trade pork should stimulate exports and reduce pork imports. That is exactly what is happening,” he said. “For the first four months of 2008, pork exports have expanded by 52 percent and imports have dropped by 12 percent.”

Trade is accounting for a substantial portion of the record pork production in the United States, he added.

In the first four months of 2008, commercial production was up 11 percent, yet when trade was considered, the amount of pork available to U.S. consumers was only up 6 percent.

“That is to say that additional trade has accounted for about 5 percent of all the added pork production in early 2008,” Hurt said. “More importantly, the export parade is just getting rolling as pork exports reached a record 22 percent of U.S. production in April. This was up from a mere 14 percent for all of last year.”

Where is all that pork going?

“The answer is almost everywhere as the world has discovered one of the last food bargains on the globe,” he said. “About one-half of the higher exports this year compared to the same period last year are headed to China and Hong Kong--most likely transshipped to China.

“Exports to most other major buyers are up as well, with Japan up 14 percent, Russia up 58 percent, and Canada up 27 percent. It is becoming clear that the world will continue to buy up the huge U.S. production until pork prices move sharply higher. Maybe U.S. consumers can’t eat all of the U.S.-produced pork at profitable prices to producers, but the world can.”

And how much pork is there going to be?

First, Hurt said, consider the June flooding and the subsequent movement of corn prices from the $6 level to $7. The bleakness of the outlook surely has convinced more producers to slaughter sows. The latest Hogs and Pigs report from the USDA shows the breeding herd down about 1 percent with farrowing intentions to drop by 2 percent this summer and then be off 4 percent this fall.

“Both of those declines will likely be larger since the USDA survey was taken before the June flooding,” he said. “Another 2 percent drop would put the summer farrowings down 4 percent and fall down 6 percent--some serious declines.

“Slaughter supplies will be up by about 10 percent in July, and then the percentages will begin to drop, with 6 percent higher supplies in August and 4 percent more in the fall. Winter slaughter supplies could finally be down by 3 percent, and spring 2009 supplies could be down as much as 5 percent.”

When does the boom in pork and hog prices come?

“Based on projections of U.S. slaughter supplies, prices will improve very late this fall and winter and go wildly higher by next spring and summer,” Hurt said. “When one adds the trade boom, this advances the price escalation. Trade data lags about two months so we are always slow to see those impacts.

“Trade will likely continue to accelerate, and this will encourage even stronger prices than the supply reductions expected for late this year and 2009.”

Hurt added that the upward movement has begun for cattle, where prices have been up nearly $10 per hundredweight in the last three weeks. Given the coming declines in pork supply and the more-than-vigorous export growth, hog prices should not be far behind.

“If U.S. consumers don’t want to buy up the last of the cheap pork, the world is anxious for the opportunity,” he said.

“The issue for individual pork producers is whether they can hang on long enough for hog prices to catch up with costs. Expectations now are for live hog prices to trade in the lower-to-mid-$50s for this summer and fall, then move into the low $60s by winter and on to the higher $60s and mid-$70s by next spring and summer. Given prices of corn and soybean meal on July 7, costs of production for farrow-to-finish producers are estimated to be in the low $60s.”

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