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Prices Hammer Pork Producer

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The Associated Press

Published: August 27, 2008

MILWAUKEE - Smithfield Foods swung to a loss in its fiscal first quarter as high commodity costs hurt the nation's largest pork producer and processor. The commodities market is so volatile, its chief executive said, the company doesn't even want to try to predict its future earnings.

Costs for key ingredients, like corn and soybean meal, were up more than 33 percent in the quarter and the price it took to raise hogs soared 25 percent. The hog production sector lost $38.8 million, down from a profit of $93 million a year ago, on the higher costs.

Smithfield said Tuesday, it lost $12.6 million, or 9 cents per share, in the period, down from a profit of $54.6 million, or 41 cents per share, a year earlier. The company said the loss was because in part to a $20.1 million write-down in the value of commodity contracts, which hurt earnings by 15 cents a share.

The commodity markets seem to be improving, said C. Larry Pope, Smithfield's president and chief executive. But he told investors in a conference call that the changing market is "staggering to us on a daily basis" and the company declined to predict the rest of its fiscal 2009 year because of it.

Producers Cutting Production

Smithfield, like other meat producers and food makers, is hurting from high costs for top ingredients like grain and fuel. Chicken producer Sanderson Farms said Tuesday it posted a third-quarter loss of $3.6 million, or 18 cents a share. A year earlier, the Laurel, Miss.-based company earned $30.7 million, or $1.51 per share.

Companies are also hurting because an oversupply of meat on the market is keeping prices down. So Smithfield and others are cutting production.

They're raising prices, too. Pope said there will be fewer hogs on the markets in 2009 compared to this year. The company said Tuesday that Butterball, its joint-venture turkey operation, will look at cutbacks as well. Pope declined to give a number, other than saying the company was "reacting to the supply issue significantly."

So with the cuts, it will be the grain market that plays a big factor in the new year.

"They continue to be so volatile and it is so difficult to predict the future, because we can't get a handle on where grain costs are going to be on any kind of a long-term basis at all," Pope said.

Diversification Key To Success

The quarter was also hurt by a $5.5 million, or 4 cent per share, charge related to asset sales by Campofrio Alimentacion SA, a Spanish processed-meats company. During the quarter, the company said it will sell its European subsidiary business, Groupe Smithfield, to Campofrio. After the deal closes, Smithfield will own 36 percent of Campofrio.

Sales at the Smithfield, Va.-based company rose 20 percent to $3.14 billion from $2.62 billion in the quarter ending July 27.

Wall Street analysts, who typically exclude one-time costs, expected a loss of 4 cents per share on $2.87 billion in sales, according to Thomson Reuters.

But there was good news in the quarter. Pork segment profits more than doubled to $61.7 million, as the business was driven by strong export demand. Generally the first quarter is the weakest for the year for fresh pork but this quarter, export volume also more than doubled on large jumps in shipments in China, Russia, Japan, Mexico and the European Union.

Smithfield said exports jumped because of the weak U.S. dollar, which makes American products like Smithfield relatively inexpensive, and the fact that pork prices were rising significantly in many other countries. Fresh pork volume rose 33 percent in the quarter on the increased exports.

Christopher Shanahan, a research analyst with Frost & Sullivan, said food companies need to diversify into new and growing markets in order to counteract sluggishness in the United States.

"They're definitely going in the right direction in terms of becoming more global in order to survive in the North American market," he said of Smithfield.

The slumping U.S. economy may have boosted the company's packaged meat sector. Though volume was flat, convenience products grew in the quarter. Spiral hams and precooked ribs saw continued double-digit volume growth.

While food companies are seeing their profits hurt by rising costs, they're also benefiting from the trend of cost-conscious consumers increasingly choosing to eat more at home, and not in restaurants, to save money.

Smithfield said it will continue to move to more higher margin and consumer-ready products in its packaged meat sector.

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