This Commodity Will Hit Record
Prices Soon
By Tom Dyson
July 7, 2008
I just read the story of an anonymous hog farmer who spent 21 years accumulating land and paying off debt to create a dream farm for his wife and two sons.
A few years ago, the farmer decided to build a "contract facility" on his 378-acre property to increase the family income. A contract facility is like a hog hotel. You look after someone else's hogs and collect rent from the hogs' owner. Farmers run contract facilities when they can't afford their own hog operations... or they don't want exposure to hog prices. You won't make as much money this way, but it's much less risky.
Two years ago, the farmer and his wife paid off the debt on their hog hotel... and decided to enter the hog business for themselves. The plan was to build a farrowing operation. A farrowing operation is like a piglet factory. You buy a herd of female pigs and inseminate them every six months. You make money selling the piglets to a finishing farm. The finishers stuff the piglets with corn until they're heavy enough for the slaughterhouse.
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So the farmer mortgaged his land again, bought 1,200 sows, and entered a contract to sell the piglets to a finishing farm at $50 per head.
Last week, the finishing farm told the farmer not to ship any more piglets. It had run out of money. Corn is the problem. The June floods in Iowa wiped out 2% of the U.S. corn crop, and corn prices spiked to more than $8 a bushel – four times the average corn price of the last 30 years. With corn at $8, it costs $150 to fatten a hog. But the meatpackers only pay $100 per hog. So the finishing farms lose $50 on every pig they raise.
Right now, finishing farms are liquidating their herds and going out of business.
So our farmer is stuck with the piglets. When I went to Iowa a few weeks ago, I heard of farmers throwing piglets in the trash... or using them as compost. For the first time in his life, the farmer doesn't have enough money to make his interest payments.
So the farmer contacted his lender and explained the situation. The loan officer advised him to sell all his land, liquidate the sows, and look for a job.
"My youngest son doesn't want to attend the fair next week because he is afraid the lender will repo his puppy," says the farmer.
When corn goes to record highs, pork must also go to record highs. That's because pork is corn refined. You could say a pig is just a sack of corn with four legs.
But there's a lag. Right now, everyone's selling hogs. The finishing operations are selling their herds, and the farrowing operations are dumping their sows. It is pushing down live hog prices.
But in nine months – when the market has worked through the excess – hogs will be in short supply. And that's when hog prices will start setting records. This shortage will last for two years, because that's how long it takes to bring a commercial hog operation from scratch to production.
In 1998, the last time the hog business washed out like this, live hog futures jumped from 10¢ to 70¢ in two years. I expect we'll see something similar this time around...
The hog ETF is the easiest way to invest in hogs. It trades in London. The symbol in Yahoo Finance is HOGS.L. Experienced traders should look at the futures market. A lean hog contract trades in Chicago on the CME.
Good investing,
Tom
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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