Smithfield Foods 2Q profit drops on grain costs

MILWAUKEE - Pork producer Smithfield Foods Inc. on Thursday reported a 76 percent drop in its fiscal second-quarter earnings, as high feed costs linked to skyrocketing grain prices hurt its hog and Butterball turkey operations.

But the nation's largest pork producer said pork volumes were up in the quarter and it's poised to benefit as consumers look to save on costs and eat more of its meat. The company also said its liquidity is strong and if it were to violate its debt covenants, it would be able to get waivers from its lenders.

Those statements meant much to investors on Thursday, just days after the nation's largest chicken producer, Pilgrim's Pride Corp., filed for Chapter 11 bankruptcy protection as it was hobbled by high feed costs and a high debt load.

Shares rose $1.38, or 22.5 percent, to $7.51 in morning trading. The company's stock is off more than 73 percent since January. It traded as high as $32.18 in the past 52 weeks.

The Smithfield, Va.-based company said profit fell to $4.2 million, or 3 cents per share, from year-ago profit of $17.4 million, or 13 cents per share. Latest-quarter results included a gain on the $580 million sale of its beef processing and cattle feeding operations.

Losses from continuing operations totaled 21 cents per share, compared with year-ago profit on the same basis of 17 cents.

Sales rose to $3.15 billion from $2.75 billion, helped by pork exports, but corn costs were 65 percent higher than a year ago and soybean meal costs surged 59 percent.

Analysts surveyed by Thomson Reuters expected a smaller loss of 10 cents per share on higher revenue of $3.2 billion. They typically exclude one-time items from their earnings estimates.

Hog production losses continued due to record high feed costs. Butterball LLC, the company's joint venture turkey operation, posted a substantial loss versus a year-ago profit as higher grain prices dramatically increased costs in the turkey business. C. Larry Pope, president and chief executive of Smithfield Foods, said Butterball production has been cut in the double digits to help stave off the high costs.

Looking ahead, Smithfield Foods said the next two quarters will be difficult due to high grain costs, but production cutbacks should help pricing. Pope said the company's hog production should be down 10 percent by the end of January.

Meat makers have been trying to cut production as a way to push price increases through. An oversupply of meat on the market has been keeping prices down, at a time when companies want to raise prices to help recoup the high input costs that reached their peak this summer.

Pope said the company's sale of its beef business will help Smithfield focus on pork, which is less costly to raise. He added that the sale to Brazilian beef giant JBS SA has helped the company's liquidity position.

"We believe that our current liquidity is more than adequate to address projected cash needs," Pope said, adding that the company doesn't anticipate problems complying with its debt payback arrangements for the rest of the year.

The company is focusing more on its fresh meat business rather than its packaged meats and is seeing improved margins there, Pope told investors on a conference call. Fresh pork volume rose 3 percent in the quarter. About three-fourths of the company's business is retail, while the remainder is foodservice, which he said helps buffer the 5 percent drop that business is now seeing.

Consumers are pulling back on their spending at restaurants as they try to save money, leading to a drop in foodservice business for the meat industry. But Pope said as the recession continues to hit consumers, Smithfield will benefit. He said fiscal 2010 would be a better year for the company.

"We are in the basic business of feeding average Americans," he said. "Pork is moderately priced. So as the recession hits some it should hit us less than others but we will have to see how that goes."

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AP Business Writer Jennifer Malloy Zonnas contributed to this report from New York.

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