The rally in hog prices this year hasn’t been an unqualified positive for everyone in the pork business. Just look at Smithfield Foods, Inc.
Shares of the country’s top pork producer have tumbled about 7 percent this week, with most of the decline following Smithfield’s April 21 announcement it took a financial hit from bad bets on hog prices earlier this year.
Smithfield said benefits of the “dramatically improved” market environment probably won’t be reflected in its quarterly results “because of significant mark-to-market losses” on part of the company’s lean hog hedged position, according to the April 21 statement.
The losses “are the result of the sizeable and unexpected run-up in the futures curve for lean hogs for the summer and fall months of 2010,” Smithfield said. Also, Smithfield’s fresh pork and packaged meats margins will reflect the impact of higher raw material costs, the company said.
Many livestock producers use futures, forward contracts and other financial arrangements to lock in profitable prices months before animals are ready for slaughter. Smithfield raises about 20 million market hogs a year, so any hedges that go wrong could result in big losses.
“It sounds like they sold forward some hogs before the big run-up in hog prices,” said Steve Share, an analyst with Madison, Wis.-based Wisco Research LLC.
Hog futures have almost doubled in the past eight months as packers competed for smaller supplies of slaughter-ready animals. U.S. pork producers reduced herds after high feed costs contributed to losses in the past two years.
In late trading today, lean hog futures traded in Chicago fell 0.2 cent to 86.75 cents a pound, up almost 12 percent since the end of 2009. CME Group lean hog futures, a carcass-based contract, traded as low as 43.575 cents in August.
Smithfield’s hedging losses – the company didn’t provide a specific figure or details on the type of hedges used – are probably no more than a small setback for what’s looking to be a profitable year following the industry-wide slump the previous few years.
In the April 21 statement, the Smithfield, Va.-based company also reiterated its “favorable” outlook for fiscal 2011.
In midday trading, Smithfield shares fell 10 cents to $19.35. The stock is still up 27 percent this year.
The hedging losses aren’t troubling, Share said, “because it won’t create a big future liability - they have the hogs to cover the futures bet.”
“However, it does suggest they weren’t able to correctly forecast the hog market,” Share said. “It would be like an investor selling a stock before it made a big move up. You can still pay your mortgage but you don’t feel very smart.”
A Smithfield spokeswoman didn’t immediately respond to an e-mailed message.
In the quarter ended Jan. 31, Smithfield posted net income of $96.5 million, compared with a loss of $135.5 million during the same period a year earlier. Sales during the quarter fell 14 percent, to $2.88 billion.
Smithfield is scheduled to release results for its fiscal 2010 fourth quarter results June 17.