Replies to post #18049 on Zeev's Turnips Patch-No Politics (ZEEV)

[AKvetch]

SFD. Low hog prices.
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Low prices have US hog farmers paring herds-trade
August 20, 2002 1:46:00 PM ET


By Bob Burgdorfer

CHICAGO, Aug 20 (Reuters) - U.S. hog producers are rushing hogs to market now, even their breeding stock, to reduce herds and minimize losses in response to higher feed costs and anticipation of lower hog prices ahead, livestock analysts said.

"I think there is liquidation going on," said Jack Salzsieder, a livestock analyst with Iowa-based Broker Professionals, who said producers are selling young female pigs that would normally be held back for breeding.

The rush to sell hogs has pressured cash hog prices, and analysts predict prices will drop even more in the fourth quarter when hog supplies are at their year's high.

The hog industry's woes may have been partially responsible for meat giant Tyson Foods Inc.'s (TSN) announcement this week that it will shut down a large part of its money-losing hog operations.

Tyson said the high cost of shipping hogs from its Arkansas and Oklahoma farms to Midwest pork plants and the cost of bringing in feed prompted the decision. The move will cut the company's market hog output to 150,000 head a year from 1 million. Its 100,000-head sow herd will be cut by about 30,000.

Livestock analysts said Tyson, which had tried to sell its hog unit a few years ago, was probably also pushed to trim its hog operations by the same forecasts for low hog prices and high feed costs that have led smaller producers to bail out.

"The old farmer out there doesn't have a press release when he sells his herd," said John Lawrence, agriculture economist at Iowa State University. "I think it (Tyson's news) is an indication of the bigger trend in the industry, because we have had sow slaughter higher since June."

An abundance of beef, pork, and poultry this year has hurt prices for all livestock. Cattle producers at times lost more than $150 on every steer and heifer they sold. Hog producers have lost $10 to $20 on each market hog, and that figure may climb to about $50 in the fourth quarter.

"Hog profitability isn't going to get a whole lot better near-term," said David Nelson, a food analyst for CS First Boston, who follows companies like Tyson Foods. "It is probably going to get worse for the next six months."

Smithfield Foods Inc. (SFD), the nation's largest hog producer, and Premium Standard Farms, the second largest, may be better positioned to handle the hog market's troubles because their hog facilities are closer to packing plants and are more efficient, food analysts said.

Cash hog prices, currently at about $30 per hundredweight, may drop to $20 or lower in the fourth quarter, said Ron Plain, agricultural economist at the University of Missouri.

"I think the upper teens is quite possible." Plain said of fourth-quarter prices. "The way corn is headed probably anything below $40 is going to be losing money."

Prices of corn, a major livestock feed, have sped higher recently in reaction to reports that late planting this spring and a hot summer hurt the crop. The U.S. Agriculture Department recently estimated this year's corn harvest at 8.886 billion bushels, the lowest since 1995. REUTERS

[jrintl]

Whadda call that formation on the Naz day chart since 1PM...the Batman? g

Since, originally you were looking for a low here Wed/Thurs...you pushing low back to early/middle next week?

[AKvetch]

SFD. Feed costs.
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Crop shortage seen likely to push food prices up
August 20, 2002 3:06:00 PM ET


By Deborah Cohen

CHICAGO, Aug 20 (Reuters) - The severe Midwest drought could spell higher retail food prices in the fall if rising commodity costs squeeze profit margins and force food companies to hike the price of their goods, analysts said.

Last week, the United States Department of Agriculture released crop projections for the fall harvest that were below already diminished expectations and sharply below year-ago levels. Corn production was seen at a 7-year low, soybean production at a 6-year low and wheat output at a 20-year low.

That could mean 1 to 3 percent higher prices in grocery stores on everything from meats to cereal and soda, as companies try to offset the impact of higher raw material costs, analysts speculate.

Food makers ranging from North American leader Kraft Foods Inc. (KFT) to cereal maker Kellogg Co. (K) may face a price spike for raw materials such as corn, soybean oil and wheat of more than 20 percent in the coming year, analysts said.

"Food companies have such little pricing flexibility, and given that ingredient costs have been benign over the past few years they may use this as a reason to take some pricing," said Goldman Sachs analyst Romitha Mally.

Mally said the increases could occur over the next several quarters, but that it was still too early to access any impact to earnings.

In addition to higher ingredient costs, shrinking crops spell a sharp rise in feed costs for companies such as poultry giant Tyson Foods Inc. (TSN), pork producer Smithfield Foods Inc. (SFD) and packaged meat producer Hormel Foods Corp. (HRL).

The price of corn -- the primary feed for meat animals -- is up 30 percent since mid-June at the Chicago Board of Trade. That has already prompted some farmers to cull herds, which adds to a meat glut currently but could push prices of animals up as the smaller supplies take hold in coming months.

HEDGING THEIR BETS

Most companies hedge their exposure to commodity price swings forward by a year or more using futures and by locking in fixed prices on contracts of everything from hogs to wheat. But they may not be adequately hedged to withstand the coming crop shortfalls.

"Competition remains keen in most of these businesses and we expect most commodity processor earnings to come through a drought with weaknesses," said Deutsche Bank analyst Eric Katzman.

Commodity-oriented food makers such as meat processors are more exposed to spikes than value-added packaged foods makers, with up to 65 percent of the cost of finished meat goods sold at retail tied to commodity costs, analysts said.

Even a small price increase can help to offset the added pressure on earnings. If Tyson raises wholesale chicken prices by a penny a pound, that could add 18 cents a share to its 2003 bottom line, said Merrill Lynch analyst Leonard Teitelbaum.

A Tyson spokesman was not immediately available to comment on pricing plans.

"I would expect that as more commodity-oriented companies report, we are going to hear about how this is going to affect quarters to be reported from September to the end of the year," Teitelbaum said. "We will begin to see more of the effect in the second quarter of the year, should the hedges run out."

Teitelbaum said he is anticipating across-the-board increases of 2 percent to 3 percent in the retail prices of poultry, pork and beef starting in the fall.

Packaged food makers such as Kraft, Kellogg and General Mills Inc. (GIS) face less exposure to the crop shortage, as commodity costs range from only 2 percent to 6 percent of the total cost of manufactured products.

More costly by far are packaging and promotional costs. Marketing, for instance, can be as much as 35 percent of the total cost of producing a box of brand-name cereal.

Depending on the category, analysts believe that they might see packaged food makers hike wholesale prices by 1.0 to 1.5 percent, attempting to pass those costs along to retailers.

Packaged foods makers are watching the trends carefully, but most are reluctant to comment on price increases.

"When grain costs rise as much as they have, we obviously have to be very concerned, and have to keep a very close eye on these costs," said John Renwick, a spokesman for Battle Creek, Michigan-based cereal maker Kellogg. REUTERS

[AKvetch]

Zeev, given lower hog prices and higher feed prices, do you have a particular reason for adding SFD to your core holdings at this time? Thanks. AK

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