Profitability pressures in the meat and livestock sector will switch from livestock rearers to processors next year as the impact of herd reductions and lower grain prices feeds through, Fitch Ratings has said.

Losses among pig producers, which peaked at $45 a head late last year, will "moderate" as inventory reductions raise animal prices and out-of-the-money hedges on feed costs lapse.

Smithfield, the pig producer, has taken an earnings hit of about $100m on hedges taken out during the price spike which ended last year.

Price rises 

However, the recovery in livestock prices which futures markets and the US Department of Agriculture are forecasting will "strain" processors' margins

"Higher live hog and live cattle prices could pressure margins for pork and beef processors, such as Tyson Foods and JBS," the ratings agency said.

They will lead to "higher input costs" for groups with only limited production capacity.

"But [they] will help profitability for the hog production industry, which continues to incur significant losses,"

'Big concern'

A potential headwind was a potential oversupply of chickens fuelled by the emergence of US giant Pilgrim's Pride from bankruptcy, and robust prices which will encourage other producers to raise supplies.

"The risk of chicken overproduction… which negatively impacts prices, will be a big concern for the protein industry in 2010," the ratings agency said.

Pilgrim's Pride plant closures, and reduced production at other companies, had "helped keep chicken supply in relative equilibrium with demand" this year.