Smithfield Foods, Inc., reported a 7.6 percent increase in quarterly profit as strong pork exports and high hog prices offset expensive corn, and the company said it expects positive industry fundamentals to continue in 2012.
Pork exports “should remain robust and we do not foresee any hog supply expansion on the horizon,” C. Larry Pope, Smithfield’s chief executive, said in a Sept. 8 statement announcing quarterly results. “Low global protein inventories continued to support historically high live hog prices.”
While high feed costs “will continue to pose a challenge,” Pope said, the company’s hedging positions will protect the company’s profit. Smithfield hedged its hog production costs in the “mid- to high-$60s,” in terms of dollars per hundred pounds, for its fiscal 2012.
Smithfield, the top U.S. pork producer, benefitted as increased demand from China and other countries fueled an export boom, helping send hog prices to record highs over the past year. Unlike most hog producers, Smithfield also generates revenue from the packaged pork it sells to supermarkets and restaurants. The company’s retail meat brands include Armour, Eckrich and John Morrell.
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
In the three months ended July 31, Smithfield’s fiscal 2012 first quarter, the company had net income of $82.1 million, up from $76.3 million during the same period a year earlier. Total sales rose 6.6 percent, to $3.09 billion.
Hog production was Smithfield’s most profitable business segment during the quarter, with operating margins at about 14 percent, or $29 per head, the company said. Prices for Smithfield’s fattened hogs averaged $69 per hundredweight during the previous quarter, up 19 percent from a year earlier, the company said.
Like other hog producers, Smithfield faces an ongoing squeeze from the corn market’s rally to all-time highs near $8 a bushel. Excluding interest on debt, Smithfield’s cost to raise hogs rose to $63 per hundredweight during the quarter, up 15 percent from $54 a year earlier.
Pope and other Smithfield executives, during a conference call following the release of quarterly results, said they expect corn to remain high-priced into next year. High feed costs already appear to be having an impact across the hog industry, Pope noted, citing increasing sow slaughter and “modest” herd liquidation.
There is “a lot of potential” for hog prices to rise further in the spring of 2012, Pope said. “There’s going to be a lot of demand for these hogs.”
In trading Sept. 8, CME Group lean hog futures for October delivery traded around 85.85 cents a pound, while June 2012 futures were about 97.85 cents. On Aug. 12, hog futures reached a record high at $1.07475. CME hog futures, which reflect carcass values, are up about 7.6 percent so far this year.
China is buying more pork after the country was forced to slaughter some of its pig herd to contain disease outbreaks in recent years.
During the first seven months of this year, U.S. pork exports totaled 2.45 billion pounds, up 15 percent from the same period in 2010, according to Agriculture Department data. China imported 157.2 million pounds during that period, a nearly 12-fold increase from 13.6 million pounds a year earlier.