November 18, 2011

 

 

Smithfield Foods Inc. (SFD) is expecting higher profits in 2012 with rising pork exports and easing feed costs.

 

The nation's largest pork producer has grown notably more confident in recent weeks because Smithfield, which both raises hogs and processes them into meat products, essentially sits at the centre of the US pork industry. That's been a good place to be in 2011, a banner year for pork prices due to soaring worldwide demand for the other white meat, particularly in China.

 

If Smithfield is an accurate gauge, 2012 should be even better.

 

The company, located in namesake Smithfield, Va., rather abruptly announced a round of meetings with big investors last week. Smithfield's message, according to disclosures: Profits look brighter and exports are surging. The company said in the meetings that profits in its fresh-pork segment likely will exceed their typical range of US$3-7 a head thanks to "very strong exports." The company previously said earnings would be at the high end of that range.

 

Although Smithfield said the investor meetings were in the works since October, the company publicly announced their content November 7, the day the meetings started. "Perhaps this gave the impression of the meetings being abrupt, but they were not," said Keira Lombardo, a Smithfield spokeswoman.

 

The meetings were the latest sign of palpable confidence among Smithfield's leadership. After a series of stock purchases by executives and directors in late September--one key director's purchase was worth more than US$460,000--the company raised its earnings projections. "Corn prices have declined, while hog futures have increased," the company said in its presentation.

 

Smithfield has capitalized this year on surging demand from China, whose state-owned Cofco Group owns 5% of Smithfield's shares. The country has been relying upon pork imports to control its runaway domestic food prices, which have threatened to sow political instability among its fast-growing population of urban-professional workers. Smithfield's exports to China have jumped this year, according to the presentation documents, to 26% of exports from 15% last year.

 

In a presentation last year, the company called its business in China "unreliable." It made no such comments this year.

 

There are signs China will become a fixture in US pork markets. As its higher-earning populations boom, they're gravitating toward higher-cost foods even as their exodus from rural regions stresses China's fragmented industry of hog farmers. The stronger appetite of the Chinese middle class has led to shortages of grain and hogs; costs for pork remain about 40% higher than last year.

 

"It's no longer very likely that China is going to be self-sustaining on things like protein," said Tim Ramey, an analyst at D.A. Davidson & Co. "That relates to the reliability question."

 

Chinese purchases in fact have a strong history of being unreliable. Due to a time-honoured vow to build self-sustainable food supplies, China is well-known for entering the US market to make one-off purchases and then pull out just as quickly. Although Smithfield is optimistic about its business with China, its profits next year will depend in part on China becoming a more-consistent buyer.

 

Livestock dealers and brokers said Smithfield's Chinese orders were big enough this autumn that the company's purchases in cash markets helped push US pork prices to a record high for October. Smithfield said it buys half its hogs in cash markets every day, but declined to address the size and nature of its recent purchases.

 

Smithfield's fortunes also will depend in part on the stability of corn prices, which have been falling from a record of US$7.99 3/4 a bushel set in June. They closed Wednesday at US$6.42 3/4 a bushel. The company said recently it has "substantial hedges in place to protect us against a run-up in the corn market."

 

Exports are a key factor in earnings of US meat companies like Smithfield because American beef and pork both fetch higher prices in foreign markets than they do stateside. Smithfield told investors last week that live hogs cost about US$0.69 a pound in the US, compared to US$1.21 in China.