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Analyst: signs point to protein liquidation, especially in hogs
Story Date: 8/22/2012
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Source: Chris Scott, MEATINGPLACE, 8/22/12
Anecdotal reports and recent slaughter data indicate that the hog industry is in the initial stages of liquidation in the Midwest, according to industry analyst Heather Jones at BB&T Capital Markets.
In a note to investors, Jones concluded that the reports of a drought-ravaged corn harvest apparently were not exaggerated and there are some indications that the situation may be worse than feared.
The situation could lead to losses for hog producers of between $15 and $20 a head through February and margins could worsen through the end of the year as hog prices continue to fall.
This summer’s heat also slowed the normal weight gain pattern for hogs, which could also accelerate the flow of hogs to market and may result in hog prices of $50 a head in December. Jones says last Friday was the first day since early January that the cutout was not below the hog cost.
Cattle
Meanwhile, year-to-year cattle slaughter trends do not indicate as stark a picture for liquidation because of a significant slaughter increase in beef cow and heifer slaughter in 2011 in response to drought conditions in the southwest. However, the two-year outlook for beef cow and heifer slaughter has accelerated appreciably in the last six weeks, a trend that Jones expects to continue.
Poultry
There are also indications that poultry producers are launching what Jones describes as “meaningful cuts” based on headcount and/or weight. The analyst believes that cuts will begin in September or October, although investors believe the cuts may be delayed into early 2013.
Jones contends that this pessimistic view goes against the challenged balance sheets, the impact of stepped-up feed costs and sluggish demand for poultry being faced by producers.
She concludes that despite the speedy industry response, there is still “meaningful risk” to earnings estimates and the next two or three quarters are “likely to be more difficult than widely anticipated.”
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