Tight animal supplies and booming pork demand from China and other foreign markets resulted in higher than expected hog prices this summer, boosting the profit outlook for Smithfield Foods, Inc., agribusiness analyst Farha Aslam said.
China is said to have bought “large quantities” of U.S. pork for August through October shipment and needs more to offset shortages and curb food inflation, Aslam said in a report this week. South Korea and Russia may also buy more U.S. pork after increasing purchases earlier this year, Aslam said.
As the largest U.S. pork producer, Smithfield is reaping rewards from the export upswing, according to Aslam, who’s with Stephens Inc., a New York-based investment bank and money manager. Aslam raised her earnings forecast for Smithfield’s current quarter to 65 cents a share from 60 cents previously.
“Hog prices have escalated, driven by a tight supply of hogs and an increase in pork export demand,” Aslam said in the report. Profits for raising hogs are about $20 per head, near historical highs, she said. Smithfield “should benefit from tight global pork supplies (and) good domestic and export demand for pork products,” Aslam said. She has an “overweight” rating on the company’s shares.
Smithfield’s improved fortunes reflect resurgence across the U.S. pork industry following a recession-driven slump a couple years ago, though record corn prices have increasingly pressured producers’ margins in recent months. Hog prices have more than doubled from two years ago, based on CME Group futures.
In trading July 25, August lean hog futures rose to the equivalent of $100.925 per hundred pounds, the contract’s highest closing price since April 20. CME hog futures, which reflect carcass values, are up almost 27 percent this year.
Virginia-based Smithfield raises about 17 million hogs a year and also has capacity to slaughter more than 112,000 pigs a day at eight U.S. plants
Soaring exports are contributing to rising hog prices, with meatpackers forced to bid more aggressively for limited supplies of slaughter-ready animals to keep pace with demand. Meanwhile, as feed costs surged, pork producers have shown little inclination to expand herds.
During the first five months of this year, U.S. pork exports totaled 2.08 billion pounds, up 18 percent from the same period in 2010, according to Agriculture Department data. China imported 130.5 million pounds during that period, a more-than 20-fold increase from 6.4 million pounds a year earlier.
China is buying more pork after the country was forced to slaughter some of its pig herd to contain disease outbreaks in recent years. Hogs in China recently traded the equivalent of about $135 per hundredweight, Aslam said, nearly double U.S. prices.
Pork imports could remain elevated for an extended period, possibly until the middle of next year, “because it will take time for China to build the hog supply to meet growing demand,” Aslam said.
Eventually, China’s pork supply and demand is expected to come into better balance, in part because of the country’s programs to increase domestic hog production, including cash subsidies and land grants, Aslam added.
The prices Smithfield receives for its fattened hogs during the current quarter are expected to average about $70 per hundredweight, up $4 from a previous estimate, Aslam said.
Aslam’s earnings estimate of 65 cents a share for Smithfield’s current quarter compares to profit of 46 cents during the same period a year earlier. She kept her full-year forecast for Smithfield’s fiscal 2012 unchanged at $2.50 a share, but said the estimate believe “may prove conservative given strong export demand is pulling up hog prices.”
In the three months ended May 1, Smithfield’s fiscal 2011 fourth quarter, the company posted net income of $98.4 million, compared with a loss of $4.6 million a year earlier. Revenue rose 7.2 percent to $3.12 billion.
Smithfield shares fell 34 cents to $22.68 in trading July 25. The stock is up 9.9 percent this year.