Hog prices are poised to jump 46 percent by June to the highest since May 1996 as producers slaughter more breeding sows to limit losses from rising feed costs, said Jason Britt, president of Central States Commodities Inc in Kansas City, Missouri. Fewer pigs may boost the cost of everything from Hormel Foods Corp's Spam to Sara Lee Corp's Jimmy Dean sausage.

Piglets crowd around their mother at a Bavarian pig farm near Traunwalchen, southern Germany. [Agencies]

In the worst year for commodities in at least five decades, hogs rose 6.6 percent, the second-biggest gains on the Reuters/Jefferies CRB Commodity Index, behind cocoa. The same global economic slowdown that halted six years of rising demand for gasoline, cotton and copper also set the stage for cutbacks in hog supplies.

"We're going to have 3 to 4 percent less pigs next year, and that should be very supportive to higher pork prices" said Mark Greenwood, who manages about $1 billion of loans and leases to swine producers for AgStar Financial Services in Mankato, Minnesota. "There is the potential for producers to have a better year in 2009."

Hog futures reached a 15-month high of 79 cents a pound on June 23 and may rise to 90 cents within a year, the highest since May 1996, Britt said. The most-active contract closed at 61.7 cents on Dec 19 on the Chicago Mercantile Exchange.

Goldman Sachs Group Inc told clients in a Dec 11 report to buy agricultural futures as the best "defensive" bet among commodities, citing global population growth. The bank forecast hogs will jump to 75 cents in the next six months, a 19 percent gain from Dec 10, while crude oil, natural gas, aluminum, copper, nickel and zinc will decline. Goldman predicted a 32 percent jump in corn and double-digit gains for wheat, sugar, cotton and coffee.

"In the middle and latter stages of recession, energy and base-metals markets tend to underperform," Barclays Capital said in its 2009 commodity outlook report to clients on Dec. 18. "Gold, agriculture and livestock tend to outperform other commodities, and it is these sectors that could prove most robust in early 2009."

Hogs are getting a boost from improved demand for pork. On average, each American will eat 50.2 pounds of the meat in 2009, up 1.8 percent from 49.3 pounds in 2008, the US Department of Agriculture estimates. Annual per capita beef consumption will decline 1 percent next year to 62.1 pounds, the agency said.

Retail US pork prices reached $3.002 a pound in the third quarter, the highest since at least 1970, government data show. Ham prices averaged $2.466 a pound in November, up from $2.29 a year earlier, according to USDA.

Pork demand, ethanol

Worldwide, pork consumption will reach 97.6 million metric tons in 2009, up 1.3 percent from this year, the third consecutive annual increase, USDA data show. Chinese consumption may rise 2.9 percent to 46.2 million tons, the agency said.

Hog farmers blame the six-year rally in energy costs and the policies of President George W. Bush for increasing prices of animal feed and forcing them to cut production even as demand rises.

The 278 percent rise in oil prices in four years through June 30, which led to a 114 percent gain in the pump price of gasoline tracked by AAA, prompted the US to boost requirements for alternative fuels. The amount of the domestic corn harvest used to make ethanol this year jumped 43 percent to 3.03 billion bushels, and the USDA forecast on Dec 11 that grain usage for fuel will reach 3.7 billion next year.

Tighter supplies sent corn on the Chicago Board of Trade to a record $7.9925 a bushel on June 27, triple the cost two years earlier. Feed costs remained high even after corn fell 52 percent in the second half because hog producers were locked into long-term contracts.

Prolonged losses

"Feed costs have really hurt the industry," said Sam Carney, who raises 4,000 to 5,000 animals on his farm in Adair, Iowa, and is vice president of the Washington-based National Pork Producers Council. "This summer we had good hog prices, but it wasn't enough to cover costs of raising a pig."

Farmers lost money on every hog sold during 14 of the past 16 months, according to Ron Plain, a livestock analyst at the University of Missouri in Columbia. On average, the loss was $45 per head in November, compared with a loss of $29 each a year earlier, he said.

It takes about six months to raise a pig to its slaughter weight of 122 kilograms, including as much as five months eating grain. To limit spending on feed and curb losses, US producers probably cut the number of breeding sows in the fourth quarter to 6.034 million, the fewest in two years, Plain said.

"From the time you decide to reduce the sow herd, it's a year before you see lower output," said Steve Meyer, president of Paragon Economics in Des Moines, Iowa. "We're still responding to the feed-price shock of last winter."

While corn has tumbled, Smithfield Foods Inc, the world's largest hog producer, will pay about $6 a bushel for the grain in the next two quarters, Chief Financial Officer Robert Manly said during a conference call on Dec 4. Corn closed at $3.8075 on Dec 19.

The Smithfield, Virginia-based company reported a 76 percent drop in fiscal second-quarter profit on Dec 4, citing higher feed costs. The hog unit had a loss of $58 million.

Analysts expect Smithfield to report its first fiscal-year loss of about 9 cents a share, excluding some items, based on the average of 11 estimates in a Bloomberg survey.

Smithfield plunged 60 percent this year on the New York Stock Exchange, the worst performer of the 16 companies tracked by the Standard & Poor's Midcap Consumer Staples Index.

Tyson Foods Inc, a US beef, poultry and pork producer, dropped 47 percent as grain costs led to losses in its chicken unit.

Chief Executive Richard L. Bond said on Nov 10 that Springdale, Arkansas-based Tyson will likely have a loss in the fiscal first quarter that ends this month. The loss will be 16 cents a share, based on the average of 10 analysts in a Bloomberg survey.