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EU woes offer hope to US hog farmers - Smithfield

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 head.

'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.

EU prospects

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 producers.

"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 first time.

However, excluding one-time effects, earnings per share eased by a more modest 20% to $0.61, ahead of Wall Street forecasts of a $0.45-per-share result.

Smithfield shares closed up 0.3% at $22.98 in New York.

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