Tuesday, June 18, 2013

Hormel warns on profits as soaring hog prices tell

by Agrimoney.com

Shares in Hormel Foods dropped after the group cut its profits hopes, blaming "lower-than-expected results" in its pork operations, pressed by a rally in hog prices to their highest in nearly two years.

The maker of Spam luncheon meat cut to $1.88-1.96 a share, from $1.93-2.03 a share, its forecast for earnings in the year to October.

The downgraded figure opened the potential for only marginal earnings growth from the last financial year, and fell short of the $1.99-a-share result that Wall Street has factored.

The downgrade reflects "lower-than-expected results in our pork operations, higher input costs and softs sales of our retail products in our refrigerated foods segment", Jeffrey Ettinger, the Hormel chairman and chief executive, said.

While Mr Ettinger reassured on Hormel's long-term prospects, saying that the group was "very bullish about our future earnings potential", the profits warning sent its shares down 4.1% to $38.99 in early deals in New York.

The group, which does rear some of its own pigs, is known as one of the most reliable US corporations, having last month paid its 339th consecutive quarterly dividend, extending a record of unbroken payouts stretching back to 1928.

Pork vs hogs

The warning by Hormel follows a sharp rally in prices of hogs, which has prevented pork processors from exploiting a rise of more than $20 per hundredweight in 10 weeks in the meat's wholesale values, the so-called "cutout".

The $100.76 per hundredweight that the cutout averaged last week "is the sixth highest weekly average ever", trailing only those recorded during a strong period in July and August 2011, Paragon Economics and Steiner Consulting said in a report.

However, lean hog prices have proven strong too, with spot Chicago futures rising from a late-March low of 76.80 cents per pound ($76.80 per hundredweight) to more than 102 cents per pound on Friday.

The rise in hog prices has left meat processors swallowing losses despite the strong wholesale pork market, with packer margins on Friday falling to a negative $13.25 per animal.

'Margins remain large'

Commentators have mixed views of the sustainability of the hog price rally, which has been widely attributed to the strength of demand in the US, thanks to the onset of the summer barbecue season, typically traced to the Memorial Day holiday weekend, and to persistent rumours of a pick-up in Chinese imports.

Chinese pork imports have tumbled so far in 2013, thanks to curbs imposed by Beijing on meat from producers using the ractopamine growth stimulant commonly used in America.

However, many observers believe that the takeover of US-based Smithfield Foods by China's Shuanghui International is opening the way to a revival in trade.

In fact, Smithfield was this month due to guarantee ractopamine-free pork from a third processing plant.

Meanwhile, US hog slaughter rates, and therefore pork supplies, have fallen to 2013 lows, as the prospect of lower feed bills, assuming domestic corn and soybean harvests meet expectations, puts the brakes on herd liquidation.

"Forward margins [for producers] remain large," US Commodities said, adding that "this will equate to no liquidation and maybe even expansion".

Peak prices?

Broker Doane Ag, noting that best-traded August lean hog futures peaked a week ago, said that "the uptrend in hog prices stalled and turned just sideways on the short-term chart".

The broker flagged "ideas that holiday featuring has run its course and that the premiums for nearby futures compared to deferred futures is unlikely to be sustained".

US Commodities forecast that "we are nearing a peak in the pork cutout" which should feed through into hog prices, and noting that US Department of Agriculture forecasts imply an uptick in slaughter rates.

However, Paragon Economics and Steiner Consulting said that it was "likely that pork values and hog prices will remain strong for several more weeks.

"The cutout has peaked in early August, on average, over the past five years."

The "key question" was whether prices of pork bellies, the source of bacon, can maintain the rise which has seen them account for 80-90% of the rise in the overall cutout.

"It seems that bacon is everywhere these days, and we are just now entering the prime BLT sandwich season as fresh tomatoes will become available soon."

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