Profit for Smithfield Foods Inc., the biggest U.S. pork producer, probably was crimped by hedging losses in the most-recent quarter, BB&T Capital Markets analyst Heather Jones said.
Jones trimmed her earnings estimate for Smithfield to 49 cents a share for the quarter that ended at the beginning of August, down from 57 cents previously, the analyst said in a report today.
“We believe the quarter may have been impacted by further mark-to-market losses on the company’s lean hog contracts,” Jones said in the report.
While pork producers returned to profit earlier this year following at least two years of losses, the sharp run-up in hog prices turned many of Smithfield’s hedging positions into money-losers. Hog futures in Chicago nearly doubled over the past year, reflecting a shrinking herd and stronger demand.
In April, Smithfield said it had “significant mark-to-market losses” on part of its lean hog hedged position, according to the April 21 statement.
The losses were 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 in April.
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.
Smithfield is still expected to turn a profit for the recently-completed quarter, thanks to stronger pork prices, Jones said.
“Our fresh pork and further processed margin assumptions are likely too conservative and if they are as strong as we believe possible, then the company could likely still achieve our prior estimate,” Jones said.
“August was a very good month overall for the industry and we believe that the outlook remains favorable as a whole,” Jones wrote. “Pork prices have remained very strong due to sustained export demand and domestic demand has remained solid despite robust pricing.”
Pork cutouts, a wholesale market benchmark, averaged 92.38 cents a pound yesterday, according to USDA data. Prices are up almost 70 percent from a year ago.
In the quarter ended May 2, Smithfield posted a net loss of $4.6 million, compared with a loss of $81.2 million in the same period a year earlier. The company is scheduled to report its next quarterly results Sept. 8.
In late trading Thursday, Smithfield shares fell 17 cents, or 1 percent, to $16.37. The stock is still up almost 8 percent this year. Smithfield shares trade on the NYSE under the symbol SFD.