Smithfield Foods Inc. will turn a stronger than expected profit this year because of high hog prices, strong pork exports and an outlook for cheaper corn, agribusiness industry analyst Heather Jones said.
Profit margins from fattening and butchering hogs was better than expected during recent months, partly because a surge in prices for slaughter-ready animals helped compensate for expensive corn, Jones, who’s with BB&T Capital Markets, said in a March 8 report.
Jones raised her estimate for Smithfield’s fiscal 2011 profit to $3.04 a share from $2.73 previously, according to the report. She also hiked her profit estimate for Smithfield’s fiscal 2012, boosting estimated per-share earnings to $2.06 from $1.80.
The improved earnings forecast “reflects our expectation of sustainable profitability enhancement and an improved outlook for pork demand, notably due to export demand potential,” Jones said in the report.
“Industry hog production margins are now profitable, due to exceptionally robust live hog prices that have more than offset $7 corn,” Jones wrote. “The strength in hog prices is attributable to tight global supplies as well as robust global demand.”
Smithfield’s hog production margins for its fiscal 2012, which begins in May, will be about $5 to $7 per animal, Jones estimated. The largest U.S. pork producer, Smithfield raises about 17 million hogs for slaughter year. The company is schedule to report quarterly results March 10.
“We expect historically solid profitability” for Smithfield’s pork processing business, Jones said. Smithfield’s fiscal 2011 “will clearly be a very strong year,” potentially the company’s best ever, she said.
A stronger outlook for Smithfield bodes well for other U.S. pork producers, suggesting that high hog prices and continued export market strength will preserve the industry’s profits even as feed and energy costs climb.
The nation’s pork exports rose 3.2 percent in 2010, to 4.23 billion pounds, and are expected to increase another 11 percent in 2011, according to U.S. Department of Agriculture forecasts.
While corn futures have doubled since the middle of 2010, prices for the grain are expected to decline later this year, assuming U.S. farmers increase plantings and produce a large harvest. In a report last month, the USDA projected the 2011 corn crop at a record 13.73 billion bushels, up 10 percent from 2010.
Based on Chicago futures, corn is expected to be almost 13 percent lower than current price by the end of this year.
At the close of trading today, March corn futures fell 12 ¾ cents to $6.98 a bushel, down from a 32-month high of $7.34 ¾ reached last week, December corn, which reflects expectations for the 2011 crop, fell 1 ½ cents to $6.09.
Lean hog futures for April delivery rose 3 cents to 84.9 cents a pound, while July futures rose 1.975 cents to $1.01425. In February, hog futures touched 95 cents, a record high for a contract closest to expiration.