(Updates with additional comments starting in second paragraph.)
June 6 (Bloomberg) -- U.S. hog producers with improved profitability will probably expand herds next year, which may test packing capacity, said Steve Meyer, president of Paragon Economics.
The cost of feed will drop early next year if the U.S. corn crop is as big as the government forecasts, according to Meyer. Farmers will boost output of the grain by 31 percent to a record 14.14 billion bushels this year, more than doubling inventories before the 2014 harvest, the U.S. Department of Agriculture said May 10.
U.S. producers lost $23 per hog on average in the year through the spring of 2013, the most severe losses since 2009, according to Purdue University in West Lafayette, Indiana.
"We could have costs down by the first quarter," Meyer told reporters at the World Pork Expo in Des Moines, Iowa. "If that’s the case, we’re set for a profitable 2014. We need a profitable year."
Producers will make money in the second and third quarters of this year with spot hog prices around 90 cents to 93 cents a pound, Meyer said in an interview. Producers are already expanding because of the lower corn costs, Meyer said. The breeding herd may be 1 percent bigger as of June 1 than a year earlier, he said. The USDA is scheduled to release its quarterly herd inventory on June 28.
The increase in sows plus the 1.5 percent increase in litter size may boost pork production 2.5 percent to 3.5 percent next year, Meyer said. Overall pig numbers may rise 2.5 percent, he said.
More hog supplies put pressure on the packing industry to expand, and the U.S. may need a new plant in the next three years, he said. Slaughter capacity is slightly larger than last year because of some "tweaks and changes" on a few plants rather than additional facilities, Meyer said. Next year’s output gains will start to push the industry near its capacity limit, he said.
"There is a point where the packing capacity in the U.S. becomes a limiting factor in this industry," Meyer said. "We need another plant a year, two years down the road."
Meyer said hog producers should be cautious about expansion because corn crops are still four months from being harvested. Producers may lose money in the fourth quarter of 2013 with spot hogs dropping to around 80 cents a pound, he said.
Corn supplies before the harvest are projected at 759 million bushels, the smallest since 1996, after the worst drought in more than 70 years reduced production to the lowest six years, the USDA said May 10. While the U.S. won’t run out of corn, some hog producers may scramble for some feed, Meyer said.
"If I don’t have much equity left and I don’t know what the corn price is going to be yet, I would think twice about expanding," Meyer said. "The guys putting in more sows, maybe they’ve got plenty of equity, and they can stand behind that."
--With assistance from Jeff Wilson in Chicago. Editors: Thomas Galatola, Steve Stroth
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