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High avocado, turkey prices curb Hormel profits
By Agrimoney.com - Published 21/05/2014

It is not just high prices of beef and pork which are hurting margins at meat processors, but soaring values of turkey and even avocado too.

Hormel Foods, the owner of the Jennie-O Turkey Store brand, said that while it still expected its earnings for the year to late October to fall within the $2.17-2.27 a share it had forecast, the result now looks like falling "towards the lower end of this range".

The forecast, which implies a result below the $2.26 a share that Wall Street analysts have pencilled in, reflects "costs pressures" in from the well-publicised strength in US prices of pork, strengthened by the dent to supplies from porcine epidemic diahorrea virus (PEDv), and beef, as both meat packers and ranchers compete for cattle at a time when the herd is at its lowest since the 1950s.

However, Hormel flagged too "elevated" prices of avocado and turkey, which are being lifted by "tighter raw material supplies".

The higher costs "are presently compressing margins on many of our value-added products," said Jeffrey Ettinger, the Hormel chairman and chief executive.

Turkey price cycle

Avocado prices, which rose 3.7% last month in the US according to official data, are being boosted by drought in California, which produces about 90% of domestic output, but where spring crop is expected by many observers to prove the lowest in 20 years.

Prices of turkey are being lifted in part by the switch in demand to other meats, as high beef and pork prices deter consumers, but at a time of depressed turkey output - a reflection of low prices early last year which prompted producers to curtail bird output plans.

March marked the first month since late 2012 when poult placements were higher year on year.

US turkey meat production fell for a fourth successive quarter in the January-to-March period, to 1.33bn pounds, a decline of 8.7% year on year.

Stocks down, prices up

The squeeze on meat supplies has been evident in a drop of 16% to 336m pounds in stocks of turkey meat in the year to the end of March, with much of what is left of less attractive cuts.

Inventories of turkey breast meat fell by 24%, and of legs by 57%.

Meanwhile, prices for many cuts have soared, with values of drumsticks gaining 45%, and of boneless breast meat soaring by 68%.

Profits rise

Hormel, which is sheltered somewhat from the market conditions by producing a large number of its own turkeys, said that its turkey division had achieved a 1.6% rise to $52.0m in operating profits in the three months to April 27, on revenues own 1.1% at $380.4m, with a boost from lower feed costs balancing out a drop in volumes.

The refrigerated foods division, the group's main earner, raised profits by 38% to $75.4m, on revenues up 9.9% a $1.11bn.

"Higher pork operating margins offset elevated raw material costs," the group said.

Hormel's group earnings rose 11.6% to $140.1m, equivalent to $0.52 per share, a little below the $0.56-per-share that Wall Street analysts had forecast.

Hormel shares dropped 3.0% to stand at $4.095 in late deals in New York.

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