Hog rebound, cost cuts provide bright outlook for Smithfield

 

 

Rebounding hog prices, a reduction in swine herds across North America, and reduced costs due to restructuring of operations are contributing to a much improved outlook for Smithfield Foods, company officials said Thursday (March 11).

 

The company reported a net-income of US$37.3 million for its 2010 fiscal third quarter which ended January 31, compared with a loss of US$105.7 million for the same period a year ago. A consolidated operating profit of US$96.5 million was reported for the quarter, versus a loss of US$135.5 million in FY 2009.

 

The biggest turnaround in the operating results from the same quarter came in the hog production division, the company said. A reduction of about 10 cents per pound live basis in the cost of producing hogs along with a gain of approximately 4 cents a pound in hog prices during the quarter resulted in a US$198 million turnaround in the division's results. That accounted for 85% of the US$232 year-on-year rebound.

 

The hog production division still lost US$55.6 million during the latest quarter, but the company expects it to turn profitable into the fourth quarter and fiscal 2011.

 

C. Larry Pope, the company's president and chief executive officer, said the company's restructuring plans are complete, and the closure of the Morrell pork plant in Sioux City, Iowa, in April will make the company more cost effective in the processing of hogs. Some of the hogs that would have been processed at that plant will be shipped to other Smithfield-owned plants in the region.

 

Pope said swine herd liquidation, or reduction in the number of sows, "has stopped" due to the rebound in hog prices to break-even or profitable levels. However, supplies are down enough to be supportive for prices.

 

Meanwhile, low quality corn due to mold and other microorganisms, has negatively impacted performance in the company's swine operations in North Carolina, company officials said.

 

They estimated the corn quality issues will raise the cost of hog production by about one cent per pound. That could be partially offset by lighter carcass weights overall resulting in less total pork output, which would be supportive for wholesale pork prices.

 

Higher hog and wholesale pork prices, while benefiting the company's hog production and fresh pork sales divisions, are expected to trim its packaged meat sales margins into the fiscal fourth quarter and year ahead.

 

Pope said as the higher priced raw materials work their way through the system, the cost of the packaged meat products will rise. Some but not all of the higher costs will be passed along to customers.

 

He said per-pound margins for the company's packaged meat products expanded during the time when hog and pork prices were very low. Sales margins are expected to remain at or above targeted levels but be reduced from where they were in the latest two quarters.