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Hormel warns of 'substantial' turkey setback from bird flu

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Hormel Foods warned of a hefty hit from bird flu to turkey supplies to its Jennie-O Turkey Store arm even as the meat group unveiled better-than-expected profits, helped by a boost to its foods arm from lower pork costs.

The Minnesota-based group, whose brands include Spam luncheon meat, unveiled a 29% rise to $180.2m in earnings for the three months of April 26, on sales up 1.5% at $2.24bn.

On a per share basis, earnings came in at $0.67, ahead of market expectations of a $0.62-per-share result

The increase was helped by a 34% surge to $216.0m in operating profits at the group's refrigerated foods division, which enjoyed "lower input costs", as improved supplies of hogs for slaughter, amid the retreat of porcine epidemic diahorrea virus (PEDv), which cut values of both pork and the animals themselves.

US hog values in March, average $50.30 per hundredweight, down 39% year on year, according to US Department of Agriculture figures.

The pork cutout, the wholesale value of the processed pork carcass, fell in late March to a six-year low of $64.56 per hundredweight, although it has since staged a sharp recovery, to $84.39 earlier this this week.

'Significantly challenged'

The Jennie-O Turkey Store arm also enjoyed a strong rise in operating profits of 49% to $167.6m, helped by margin improvements both from lower grain and fuel costs and growth in more expensive products.

However, the knock-on effect of the US bird flu epidemic, which has prompted the culling of more than 33m birds in infected poultry flocks, "began to impact operations towards the end" of the quarter, Hormel said.

The division "exited the quarter with substantial supply chain challenges brought on by avian influenza".

And "we expect Jennie-O Turkey Store to be significantly challenged going forward due to the impacts of avian influenza on our turkey supply chain", said Jeffrey Ettinger, the Hormel chairman and chief executive.

The group forecast that its earnings for the year to late October would come in "at the lower end" of the $2.50-2.60 per share that it has guided to.

'Almost 6m turkeys affected'

The caution follows an announcement by Hormel two weeks ago that it was laying off 233 workers at a Minnesota plant because the bird flu outbreak has reduced the number of turkeys available for processing.

The group last year sourced some 78% of its turkeys from producers in Minnesota - where about 5.5m turkeys and egg-laying chickens have either died from bird flu or are being culled - and in Wisconsin, which last month declared a state of emergency over the outbreak.

The USDA last week cut by 25m pounds its forecasts for US turkey production in both the April-to-June and July-to-September quarters, saying the downgrades were "due largely to concerns that birds lost from [bird flu] outbreaks in turkey flocks in Minnesota and other states would limit production growth".

The downgrades were "based on estimates of almost 6m turkeys affected by [bird flu] outbreaks as of early May," the USDA said, adding that the cuts might have been worse were it not for signs of expansion in terms of turkey eggs set in incubators, and the number of poults placed for feeding.

The USDA's estimate for total US turkey meat output in 2015, at 5.979bn pounds, is still up 3.9% year on year.

Hormel shares closed up 4.2% at $58.14 in New York.

By Agrimoney.com

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