Thursday, February 28, 2008

Smithfield Foods (SFD) Continues to Struggle With Input Costs

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Smithfield Foods (SFD) is a stock I considered adding very early in the fund, but with the huge run up in grain costs even back then, not to mention how it's gotten much much worse since, I just have a hard time investing in anything that is related to a cow or a pig (I do have one, but it is based on China). I do think however (and today's news reinforces this thesis), this is what you will see a year from now: We are going to see cows slaughtered now because they are getting too expensive to feed. So what will that lead to down the road? You guessed it; a (relative) shortage of beef. And what does that mean for our pocketbooks? Inflation. Even more than we see now. Right now producers are passing along the grain costs - but at some point it's just going to get to a point where they raise less livestock... and for a country (world) increasingly loving protein that causes more issues.

On the bright side, we've won the votes of the farm block with our ethanol push. Always a great thing!

Smithfield Foods out with earnings today.... if not for the darn grain costs, I'd really be interested in this one as a pork exporter play. As with the retailers, and the like, expectations have been beaten down so badly that it is becoming easy to "beat" the number. So while year over year results are degrading they are "better than expectations".
  • U.S. meat company Smithfield Foods Inc (SFD) on Thursday reported lower quarterly earnings due to a big loss in hog production, but the results beat Wall Street forecasts by a wide margin as an acquisition and strong pork exports more than doubled profits in pork processing.
  • The Smithfield, Virginia-based company reported earnings for its fiscal third quarter ended Jan. 27 of $54.6 million, or 41 cents per share, compared with year earlier results of $60.4 million, or 54 cents per share.

  • The hog unit, the nation's largest, lost $80.7 million on an operating basis versus a $4.5 million year-earlier profit, as higher production costs and lower hog prices weighed. The hogs may be a drag on fourth-quarter results too, the company said.

  • "We enjoyed very strong fresh pork margins that were much higher than historical levels as a result of lower hog costs and strong industry exports," Smithfield Chief Executive Officer C. Larry Pope said in a statement.

  • "Our fiscal fourth quarter will likely be very difficult, as our hog production operations probably will not achieve profitability," Pope said in a statement. "Meanwhile, pork exports are expected to continue to grow, which will lend support to the hog and pork markets."

  • Smithfield is the largest U.S. hog producer and earlier this month said it was reducing by 4 to 5 percent its breeding herd because of high feed prices.

  • On Thursday, Smithfield said hog prices averaged $37 per 100 lbs for the quarter, down from $44 a year earlier, while production costs rose to $49 from $42 a year earlier. (now that's a problem; a huge one)

So let's check back in a year; you are going to see a lot of questions as to why meat products are skyrocketing... and probably we'll drag a few executives up to Congress to question them ;) No one will look into the mirror there in DC and ask, why do I continue to burn food for fuel in a world headed for food disaster? But for now they are too busy proposing bailouts for house speculators and those who bought at the top.... they will only investigate after something turns from huge problem to unmitigated disaster. That comes next year in food.

No position


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