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Last updated: October 25, 2012 7:11 pm
One of the biggest US pork and turkey producers is taking radical action against the effects of soaring feed prices. It is sending animals to slaughter with less meat on their bones, rather than fatten them on the farm.
“We lose less money if we sell less pounds,” says John Prestage, senior vice- president at Prestage Farms. “These high feed prices are absolutely killing us.”
It is large grain consumers such as Prestage that will determine the direction of agricultural commodities markets in coming months. With much of the US corn and soyabean crop harvested after the worst drought in decades, and the South American season just starting, demand is driving grain prices.
Corn and soyabeans are used in industries from animal feed mills to biofuel refiners. So-called demand rationing, the painful process of livestock culling and plant shutdowns, should keep grain stocks from falling to critically low levels. But the early evidence suggests such rationing has not gone far enough.
The US National Oilseed Processors Association, which includes Archer Daniels Midland, Cargill and Louis Dreyfus Commodities, says its members crushed more soyabeans in September than the same month a year ago. “That will have to slow, and eventually it will because we’ll just run out of soyabeans, but right now it’s not happening,” says Darrel Good, agricultural economist at the University of Illinois.
Indeed, China, the destination for more than 60 per cent of the world’s soyabean exports, imported record tonnage in September and advance sales from the US are galloping ahead of last year’s pace. The government has been supporting pig farmers by buying frozen pork and “hog supply continues to rise despite the slowdown of China’s economy”, Rabobank says.
Bunge, the soyabean processor and agricultural trading house, has said stronger currencies and low freight rates had blunted the impact of higher commodities prices for many Asian consumers. “The demand out of Asia remains pretty strong,” Drew Burke, chief financial officer, said on a conference call on Thursday.
View the effects of the extreme drought faced in the US heartland in our interactive graphic.
The US Department of Agriculture forecasts that Thailand, Turkey and Vietnam, each a top 10 soyabean importer, will increase purchases this year.
Washington, meanwhile, is buying $100m of pork and $50m of chicken to help domestic farmers struggling with high feed costs and low meat prices. In the US livestock and poultry industries, demand rationing has been uneven.
The government’s quarterly pig report showed a breeding herd 5.8m strong – a minuscule 0.3 per cent decline from a year earlier. New York-listed Smithfield Foods, the world’s biggest pork producer, has not cut back on the 135m bushels of corn and wheat and 1m tonnes of soya meal it feeds pigs each year.
“Our farms are running at or near capacity,” the company says. Many companies, including Smithfield, hedged feed costs at lower levels earlier this year, leaving them much less sensitive to high prices now. Prestage of North Carolina says its use of feed has declined about 7.5 per cent since it began selling lighter pigs and turkeys.
At chicken farms, the number of eggs placed in incubators to be hatched into broiler chickens was running at or above last year’s levels until just last week, when it fell 4 per cent to 177m eggs. Sanderson Farms, a New York-listed chicken producer, can process 9.4m birds a week. But it will slow operations starting next month, says Mike Cockrell, chief financial officer.
“We plan to run at 96 per cent of full capacity for the foreseeable future,” he says. “We believe high-priced grain is a reality until we get into next spring and maybe get some help from South America.”
Beef producers are rationing demand more vigorously. The number of cattle placed on US feedlots, vast pens where they feast on corn before shipment to meatpackers, fell 19 per cent on year in September, the USDA reports. The ethanol industry, the largest single user of the US corn crop, has cut output about 10 per cent from a year ago, with a corresponding reduction in corn demand. Yet it is still expected to use 42 per cent of the US corn crop.
Barring blockbuster South American crops in the next six months, some argue prices will need to rise again to really deter consumers – and spur serious rationing. “You can’t use corn and soyabeans at the rate you used them last year. There is not enough,” says Chris Hurt, agricultural economist at Purdue University. “You’ve got to ration.”
Additional reporting by Emiko Terazono in London
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