Smithfield Foods flagged an extra reason for hope for
America's loss-making hog producers, in lower production from European peers,
as the group forecast a return to the black for its pig-rearing division.
The Virginia-based group said its US hog production business
fell $32.6m in the red in the three months to October 28, compared with a
$63.9m operating profit a year before, hurt by higher feed bills which, in
encouraging herd reduction, led to weaker pig prices too.
The sales prices of hogs fell to $58 per hundredweight, from
$69 per hundredweight a year before, taking them below rearing costs, which increased
by $5 to $69 per hundredweight.
And Smithfield, which undertakes an active hedging strategy,
said that its losses would have been worse were it not for advance positions
which limited the impact of the market squeeze.
"Although we were dissatisfied by the performance in our hog
production business, our successful risk management strategy mitigated losses
and produced results that we believe were significantly better than the industry
as a whole," Larry Pope, the Smithfield chief executive, said
Purdue University agricultural economists have pegged hog
producers' losses in the final quarter of 2012 reaching "as much as" $50-60 a
'Higher hog prices'
However, Mr Pope forecast that the hog division would end
the group's fiscal year, which runs to the end of April, operating in the black,
helped by its hedging strategy, but also by a recovery in hog prices.
"Lower supplies of competing proteins should support higher
hog prices," with beef and chicken output tailing off.
However, exports would too, helped by a drop in European
Union production, where enhanced animal welfare regulations coming into force
next year are believed to be prompting farm cutbacks and closures.
"Industry analysts forecast record US pork exports
again in calendar 2013, as lower global pork production and higher pork prices
— especially in the EU — should bolster demand for US pork," Mr Pope said.
Opinions are mixed over the prospects for EU pork production
in 2013, with the US Department of Agriculture forecasting a drop of 0.5%, to
22.6m tonnes, but a 4.2% rise in exports, to 2.38m tonnes.
However, the European Commission itself sees output falling
3.1% to 22.3m tonnes, and exports slumping 15.0% to 1.87m tonnes.
The forecast is "based on the assumption that the new welfare
rules would lead to a reduction in the sow herd and that expected higher feed
costs would further depress production", commission staff said in a report.
A briefing from analysis group Paragon Economics and Steiner
Consulting said that historically, "the US industry has filled such voids" in
pork exports, but cautioned over the growing threat from Brazil's hog
"Can the US do so in 2013 given growing Brazilian output and
the weak real?" the briefing asked.
Hog price hopes
Meanwhile, hopes for US hog prices received a further fillip
on Thursday when Morgan Stanley said that it was "bullish" on values for 2013,
forecasting an average price of 100 cents a pound, some 10% higher than futures
are factoring in.
High slaughter rates, encouraged by elevated grain prices,
will extend into early 2013, but give way to more supportive fundamentals later
in the year.
"Lower production should prove net bullish price for prices
in 2013," with output falls to leave hog inventories at the close of the year "at
their lowest since 1996".
Purdue University has forecast the US hog industry returning
to profit in the second quarter of next year, with "lower feed prices late next
summer expected to sustain a profitable industry into the fall of 2013 and
winter of 2014".
Ahead of forecasts
Smithfield's comments came as it unveiled a drop of 90% to
$10.9m in earnings for the three months to October 28, on revenues down 2.6% at
$3.22bn, kept in the black by rising margins in its packaged meats business.
In bacon, the group exceeded a 20% US market share for the
However, excluding one-time effects, earnings per share
eased by a more modest 20% to $0.61, ahead of Wall Street forecasts of a
Smithfield shares closed up 0.3% at $22.98 in