Smithfield Foods announces $12.6 million loss in first quarter

Struggling with high grain costs, Smithfield Foods Inc. on Tuesday reported a $12.6 million loss in the first quarter of its fiscal year.

The loss was the equivalent of 9 cents a share. Smithfield, the nation's largest hog producer and processor, reported a profit of $54.6 million, or 41 cents a share, for the same period a year ago.

Sales, however, rose 20 percent to $3.1 billion during the first quarter, which ended July 27.

The announcement Tuesday was the latest in a string of downbeat earnings reports, but the first of late to record a loss. In the previous quarter, Smithfield reported net income of $2.4 million - a 94 percent decline from the same period in 2007.

Smithfield's shares fell $1.62 - or nearly 7 percent - Tuesday to close at $21.91 on the New York Stock Exchange.

"Overall, the business, as many of you know, has been tough," C. Larry Pope, Smithfield's president and chief executive officer, told analysts Tuesday during a conference call. "Grain costs have now been elevated for some time.... That is severely impacting our business and is a large factor in terms of where our results are, this quarter and last quarter."

Pope also reiterated his opposition to the federal set-aside of about 30 percent of the corn supply to produce ethanol. "We are suffering and laboring under a policy that forces us to compete with the oil companies for corn," he said.

Pope avoided a long-term prognosis. Corn prices have recently come down, he said, but hog prices also tend to drop in the fall.

"These markets have been volatile like they've never been volatile before," he said. "It's extremely difficult to give good vision or clarity."

The earnings results, Smithfield said, included a $20.1 million after-tax loss in the value of commodity contracts.

Facing a 39 percent increase in corn costs, the company's hog-production unit lost $38.8 million, compared with a $93 million gain in the same quarter last year.

On the up side, Smithfield more than doubled its pork profit, to $61.7 million from $26.5 million. Contributing to the boost: a 124 percent increase in exports.

With a low dollar, countries including China, Japan, Korea and Russia are "seeing substantial increases" in pork imports, Pope said. "That is working to our benefit, taking product off the domestic market."

Pope termed results in packaged meats "solid." "Our margins are down somewhat, not as much as I thought they might have been," he said. Cleveland Research Co. analyst Christine McCracken, however, termed the packaged-meat margins "disappointing" in a question to Pope during the conference call.

International profits totaled $5.9 million during the quarter, down 60 percent from $14.9 million in the same period last year. Business in Western Europe is "struggling," Pope said.

Pope said Smithfield would make "significant" production cutbacks at its Butterball turkey affiliate. Earlier this year, Smithfield announced a 5 percent reduction in its herd of breeding hogs to reduce costs.

On Tuesday, Pope also discussed Smithfield's recent agreement to sell nearly 5 percent of its common stock to Cofco Ltd., China's largest national agricultural trading and processing company. Last year, Smithfield agreed to export at least 60 million pounds of pork to Cofco.

"I think this can be the beginning of a very long-term relationship," Pope said. With the stock deal, "they're trying to put some glue on the relationship. 'Let's make a long-term investment and give you the capital you need.' "

Cofco also is expected to supply a new board member for Smithfield. At the company's annual shareholders meeting in Williamsburg today, Cofco Chairman Gaoning Ning is expected to be approved as a new director for Smithfield.

In a research note Tuesday, Credit Suisse analysts said: "Smithfield remains a 'wait until next year' story. Investors need some color on whether exports to China will continue to grow post the 2008 Olympics."

Philip Walzer, (757) 222-3864, phil.walzer@pilotonline.com