June 20, 2018 / 4:30 PM / a month ago

Trade woes shrink U.S. pork packer margins to 3-year low

CHICAGO, June 20 (Reuters) - Margins for some of the biggest U.S. pork processors have lately slipped to their lowest level in three years, dragged down by surging hog prices and mounting worries over trade with China and Mexico, analysts and economists said.

They said packers, including Tyson Foods Inc and Smithfield Foods Inc, might stem declining margins by paying farmers less for hogs while raising wholesale pork prices.

But another option - reducing input costs by trimming plant operations - is a tricky proposition amid seasonally tight hog numbers and four new plants competing for market share.

Colorado-based analytics firm HedgersEdge.com calculated that U.S. pork packers for the week ending June 15 lost an estimated $5.41 for each hog processed. It was the widest loss since the average loss of $7.31 for the week ending May 11, 2015.

Margins began eroding a few months ago as pork demand suffered amid chatter over U.S. trade disputes with China and Mexico, said HedgersEdge analyst Bob Wilson. At the same time, smaller-than-expected supplies sent hog prices higher, he added.

Late Tuesday's hog price, on average, in the closely watched Iowa/Southern Minnesota region was $83.50 per hundredweight (cwt), nearly double the price on April 6, according to U.S. Department of Agriculture (USDA) data.

On April 2, China hit U.S. pork with stiffer tariffs, and Mexico recently followed suit, in retaliation for higher duties by Washington on steel and aluminum from both countries.

"With the uncertainty in his sales prospects for exports and negative margin, he is reining in his hog purchases," Wilson said, referring to packers.

He added, however, that new packing facilities that have come online since late last year could lend support to hog values. "They didn't build those plants to let them sit idle either."

Hog prices are typically at their highest when supplies are at their lowest during warm weather months, partly influenced by the number of baby pigs that survived during the winter, said analysts and economists.

Pork demand is challenged when tariff threats cause normal contracts between domestic sellers and foreign buyers to be set aside, said Purdue University economist Chris Hurt.

"With these trade threats going back and forth, if those contracts are being signed today it probably stipulates who would pay that tariff - a major risk that nobody wants to assume," he said. (Reporting by Theopolis Waters in Chicago Editing by Matthew Lewis)

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