Smithfield Foods Inc. Thursday reported stronger than expected quarterly profit and said it expects a record year as high hog prices and strong pork exports offset surging corn costs.
The outlook for corn prices and supplies is “getting brighter” amid a growing push to reduce or eliminate federal ethanol subsidies, Smithfield’s chief executive officer, C. Larry Pope, said in a statement today.
Corn prices may decline in coming weeks, Pope said, allowing the company to lock in feed supplies at lower costs. Even if corn rallies next year, Smithfield expects to have its feed needs met and will have hedges in place to protect against price spikes.
“There’s always that risk we could have a short crop,” Pope said during a conference call today following the release of the Smithfield, Va.-based company’s quarterly results. “If we get runaway markets this summer, I think we’ll have locked in our corn.”
Corn futures rallied above $6 a bushel to two-year highs earlier this fall as the U.S. harvest produced lower-than-expected yields. Higher corn prices are squeezing pork producers’ margins, threatening profits that returned earlier this year following at least two years of losses.
As the U.S. herd shrank in recent years, Smithfield benefited from higher prices for the pigs it raises and from stronger demand for the bacon, chops and other cuts sold to supermarkets and restaurants. The largest U.S. pork producer, Smithfield expects to raise about 17 million hogs this year.
During the quarter ended Oct. 31, live hogs averaged $56 per hundred pounds, up 54 percent from the same period a year earlier, Smithfield said.
Hog prices will likely remain high through early 2011 because there is little, if any, herd expansion happening anywhere, Smithfield said. Unlike 2008, when soaring corn prices helped trigger widespread herd liquidation, high prices for hogs and pork will help soften the impact of costlier feed.
“We don’t have cheap hog prices and high-priced grain,” Pope said. “We could have high-priced grain with high-priced hogs. And I don’t see big expansion going around the world that’s going to drive pricing back down. If anything, there’s probably a little bit of reduction going on.”
At today’s close, March corn futures in Chicago fell 1 cent to $5.73 ½ a bushel. Corn is up 62 percent since the middle of the year.
“I don’t like ($5 corn), but it looks like it’s stabilized,” Pope said. “I believe there is an opportunity to buy corn at lower levels. Even with grain at these $5 levels, we can cover it.”
“I don’t think we’re going back to $4 corn, but it may drop back a bit,” Pope added. “We still think there’s some opportunity for a downward move.”
Smithfield’s net income totaled $143.7 million for the three months ended Oct. 31, the company’s fiscal 2011 second quarter. That was a record for any of the company’s quarters and compared to a net loss of $26.4 million during the same period a year earlier. Sales rose 12 percent to $3 billion, Smithfield said today.
“All indications are that fiscal 2011 will be a record year for the company,” Pope said.
During the previous two fiscal years, Smithfield posted a net loss of almost $292 million.