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US hog producers face losses - even before risk of Brexit setback

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Hog producers in the US are poised for at least six months operating in the red – even before factoring in the dent to the world economy from Brexit, which "could be negative" for all US ag exports.

US cash hog prices, having averaged some $55.50 in the April-to-June quarter, may see some gains in the July-to-September period, averaging $55-58, said Chris Hurt at the University of Illinois.

That will present operators with a profit of about $8 per animal, assuming feed prices follow levels suggested by the current futures curve.

However, values will then "fall sharply" in the October-to-December period, to $45-48, putting a loss of $19 per head on the cards – a deficit likely to be repeated for the first quarter of 2017.

And breakeven could be the best that producers could hope for in the April-to-June period of 2017, even assuming a revival in hog prices to $52-56.

'Sizable price advantage'

And the outlook – which put operators on for a loss of $4 per animal this year, following a $3 loss in 20154 - could be even worse if a revival in US pork exports is snuffed out by strength in the dollar and worsened global growth prospects following the UK's vote last week to quite the European Union.

Appreciation of some 3.5% in the dollar against the euro since the Brexit vote has handed a competitive advantage to EU pork exporters, which have been the top-ranked shippers of the meat for the past two years.

"Brexit gives our biggest global pork competitor a sizable and immediate price advantage," Professor Hurt said.

'Negative for ag sales'

And that is before factoring in the potential hit to world economic growth forecasts from the knock-on effects of the UK-EU divorce.

"The longer-term economic implications of Brexit may be the most important and could reduce the rate of world economic growth," he said.

"If Brexit does slow world income growth, that could be negative for global sales of pork and other US agricultural products."

'Severe headwinds'

Professor Hurt also flagged the importance of China's booming demand for pork imports, and "how long their internal pork shortage will continue", in determining US price – even as another commentator flagged what he viewed as signs of "something ominous happening in China".

John Clemmow, at Barclays, said he could see "clear signs that the Chinese economy has resumed its downward trend.

"Those asset prices that floated up on a reinterpretation of Chinese prospects since the lows of January are now facing severe headwinds."

He supported his claim with data including a 12.9% drop in Chinese diesel demand in May, a 2.3% drop in steel demand in the first five months of 2015, and willingness by authorities to let the renminbi depreciate.

'Higher pork supplies'

Professor Hurt's comments follow Friday's release of official data which showed the US hog herd up 2% year on year, a bigger rise than investors had expected.

The increase included a 2.5% rise in young pigs, "somewhat more than had been expected", reflecting a 1.5% rise in farrowings - above the 0.6% increase expected by the market - and an increase in litter size.

"This means a bit higher pork supplies later this year than had been anticipated," fuelling the forecast decline in hog prices.

Paragon Economics and Steiner Consulting said: "Market hog numbers and therefore the total inventory were larger than anticipated.

"Instead of categories in the report being in the range of unchanged to up 1% year-over-year, results fell in the range of increasing 1-2%."

Best-traded August lean hog futures closed down 1.7% at 83.50 cents a pound in Chicago on Monday.


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