November 6, 2006

Meat companies' shares fall on feed cost fears

Shares of some meat produces declined Friday, November 3 after a Credit Suisse, leading financial service provider analyst said rising feed costs due to the biofuel boom would weigh on the sector.

Ethanol capacity expansion would continue until the industry reaches break-even or begins losing money, pointed David C. Nelson, an analyst with Credit Suisse. Assuming oil prices stayed near US$60 per barrel, corn prices could rise toward US$5 per bushel, a cost level too high for profitable hog production, he added.

Corn prices on the CBOT rose sharply on concerns about the size of the US corn crop and ongoing demand for ethanol.

Nelson also estimated every penny increase in the corn price would be a penny decrease for Smithfield's earnings per share, the latter being world's largest hog producer and pork processor. In the long-term, higher feed costs would mean industry consolidation with Smithfield being a "natural acquirer" because of its size, he noted.

However, the magnitude of the impact of shifting so much crop production from food towards fuel was only beginning to be recognised for Smithfield and across global agriculture and agribusiness, he wrote. He also downgraded Smithfield to "neutral" from "outperform". Tyson Foods, the largest meat processing company also shared Nelson's downgrading.

The Smithfield, Va.-based company's shares fell 65 cents, or 2.5 percent, to US$25.70 during morning trading on the New York Stock Exchange. Tyson would also possibly face the same fate, though less in impact. Shares also dipped for companies like Gold Kist, Premium Standard Farms and Sanderson Farms.