Feeding Frenzy in the Hog Industry
By Tom Dyson
January 31, 2007

There were a thousand pigs in the shed. The moment the farmer touched the latch on the shed's door, the pigs went crazy... squealing and banging furiously on their confinements...

I'd never heard such a racket before. Honestly, the sound was so intense it frightened me.

There was a full plastic feeder above each pig. A washing line ran all the way down the shed, connecting the feeders to a screw in the end wall. Using a drill to turn the screw, the farmer opened the feeders and dumped half a gallon of grain into each pig's trough. Frenzied squealing turned to frenzied guzzling. Tranquility returned.

A few months ago, I spent a day working on a hog farm... The farm's owner is a good friend of mine. He explained the economics of a hog farm to me as we inseminated sows with long plastic straws.

Feed is the single-biggest expense in producing a hog... it accounts for more than half the total cost of production. Think how important wood is to a paper mill, or leather to a cobbler. That's how important feed is to the hog farmer.

Feed is 80% corn. Energy, land, labor, insurance premiums, medicine, and feed additives make up the rest of the costs.

An efficient American hog farmer can expect to make only three or four dollars in profit for every hog he sends to the slaughterhouse. Full-grown hogs sell for around $120, so you can see profit margins are razor thin. Then there's the brutal competition, the volatile profits and, worst of all, the threat of disease. Disease is a permanent source of anxiety for the farmer. If it strikes, chances are, it'll wipe him out.

Despite these troubles, the last few years have been good for hog producers. Iowa's Globe Gazette says the pork industry has been booming, enjoying 34 consecutive months of better-than-average profits...

But as I've just discovered, that's all about to change... 

In the last 12 months, the corn price is up from $2.17 to $4 a bushel... and all the other costs are way up, too. At the same time, hog prices have fallen relentlessly. We now have a situation where hog farmers are losing about $50 on every hog they raise. At current pork prices, farmers get about $124 per hog and they need $175 to break even, according to the Canadian newspaper The Chronicle Herald.

I received an e-mail from the hog farmer last week confirming the situation:

"If prices don't get better with continued high grain, a lot of pork producers will be in a world of hurt, myself included."

When hog production becomes a losing proposition, farmers bring their hogs to market earlier than usual... so they don't have to keep wasting money on feed. Evidence suggests this is happening already:

My friend tells me he's heard of at least two planned expansions of sow herds being put on hold. He reports outright liquidation of sow herds in Canada and says there's been a big liquidation in northwest Iowa, where he farms.

Drs. Glenn Grimes and Ron Plain, farm economists from the University of Missouri, have noticed the same thing - sow slaughter is running 10% greater than earlier this year.

As long as corn trades around $4 a bushel, there's only one possible outcome from this intense liquidation: Soon there will be a supply shortage and hog prices will rise.

Right now, lean hogs trade for 64¢ a pound in the futures markets. It's a good bet they'll rise to 75¢ in the near future... but maybe a lot more. Stock investors should research Smithfield (SFD) and Hormel (HRL)...

Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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