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Hormel pork margins to dip, as hog prices plunge

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Hormel Foods, in the face of tumbling hog prices, forecast a retreat in its "strong" pork production margins, which helped drive group profits above market expectations.

The US-based group - whose brands include Spam luncheon meat and Jennie-O turkey – credited lucrative pork margins for a doubling to $90.0m in operating profits at its refrigerated products division, the company's biggest, in the three months to July 27.

The performance helped lift group earnings 21% to a record $138.0m for the quarter, on revenues up 5.8% at $2.28bn.

The earnings equated to $0.51 per share, $0.03 per share above Wall Street's consensus forecast.

'Pork markets on a downtrend'

However, "pork operating margins are not expected to be as beneficial" in the current quarter, the last of Hormel's fiscal year, group chief executive Jeffrey Ettinger said.

Although pork producers are benefiting from lower feed costs, thanks to weaker corn and soybean prices, lean hog values have tumbled from the record high of 133.80 cents a pound for Chicago's spot futures contract on July 10.

Chicago's current spot lean hog futures contract, October, stood at 91.425 cents a pound on Thursday, down 1.2% on the day and 32% below last month's all-time high.

Futures have been undermined in part by the Russian ban on imports of US agricultural products, but also because of high hog slaughter weights, boosting supplies at a time when the knock-on effects of high retail pork prices are amplifying a seasonal downturn in demand.

"Cash pork markets have been on a downtrend, in part because of seasonality but also because the higher prices have finally been passed on at the retail level," a report from Paragon Economics and Steiner Consulting said.

"Ham prices are significantly lower and how they perform in the next 60 days will likely set the tone for the entire hog complex in the fall months."

'Unusually high cost pressures'

Still, Hormel said that its grocery products division - for which pork is a major cost, along with the likes of peanuts for making Skippy peanut butter – would not see an easing off in pressures from raw material bills.

"The impact of cost pressures in our grocery products segment is likely to continue in the fourth quarter," Mr Ettinger said.

The division's raw material costs had been "unusually high" in the May-to-July period, prompting a 36% drop to $33.8m in its operating profits.

Hormel forecast a "strong finish to the [financial] year" from its Jennie-O Turkey Store business - where operating profits jumped 42% to $64.8m in the latest quarter thanks to "strong commodity turkey prices".

But the group stuck nonetheless by its forecast for full-year earnings of $2.17-2.27 per share.

By Agrimoney.com

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