Thursday, December 9, 2010

Meat Inflation Picking Up

Thankfully there continues to be no inflation ex-energy, ex-food, ex-tuition, ex-healthcare, ex-everything not housing or electronics.  Smithfield Foods (SFD) the largest hog producer in the U.S. reported a standout quarter - I am shocked they are able to pass along the price increases.  (perhaps the record federal subsidy into the food stamp program is helping producers push along costs without pushback - not sure)  The stock was struggling because the thesis was as inputs to feed hogs were jumping margins would be compressed as Smithfield and peers would not be able to pass along higher prices - but this thesis was apparently very wrong.   This was a stock I watched very closely in the 2007-2008 period for the exact same reasons I am watching it again today.  [Aug 26, 2008: Smithfield Foods, Sanderson Farms Continue to Suffer]  [Jun 30, 2008: Listen to the Companies, not Government Reports - Brunswick Corp and Smithfield Foods]  [Feb 28, 2008: Smithfield Foods Continues to Struggle with Input Costs] [Nov 12, 2007: Tyson Foods Continues to Point to Food Inflation] [Aug 29, 2007: Inflation in Groceries]

Again at this moment the market could care less just as it cared less at record highs in 2007 (the Fed was cutting rates and would save us from that silly subprime issue!) when all was good in the world but commodity inflation was surging.  We seem to be almost at an identical structure perhaps at summer/fall 2007 pricing levels in some commodities (while others are already more like summer 2008 prices before things collapsed).  This is like the movie Groundhog Day.  The big lever remains crude oil as it feeds the entire global transportation chain - so far it has 'only' hit $90.  About $20-$25 from here and I would express extreme caution about the effects to the consumer, especially the American kind.... but we're already seeing flash points circa 2008 in foodstuffs.  Go stock up on bacon.

Via Marketwatch:
  • Virginia-based Smithfield sells ham, bacon and sausage to supermarkets and fast-food chains. It is the No. 2 U.S. maker of deli meats. Company brands include Armour-Eckrich, Farmland and John Morrell. 
  • Smithfield’s financial turnaround is gaining strength as pork prices have gone up with a sharp reduction in herd sizes. This has driven up lean hog prices in the futures market. Pork exports also have increased, spurred by the weak U.S. dollar.
  • Smithfield said average prices for the fresh pork it sells jumped 24%, while packaged-meat prices rose 19%.  
  • Live hog prices jumped 56%.
Again, in the government's eyes (and their reports) - as long as the supermarket reduced the portion size by 19-24% OR people substitute down to cheaper meat (i.e. SPAM) there is no inflation here. Whatever it takes to keep the senior's SS cost of living adjustment at 0-1% annum and for Ben to QE to the moon.

Speaking of Spam - believe it or not, I wrote about that in 2008 as well ... Spam sales surged when there was 'no inflation' in 2008. [May 29, 2008:  To Laugh or Cry - Spam is Hot]  And lo and behold, the maker of Spam is surging....coincidence?  Nah, there is no inflation after all.

No position

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