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Why Pork Is Poised for a Rebound


Smithfield and Tyson report slower sales of the other white meat, but a turnaround appears imminent.

After the bell on Thursday, Smithfield Foods (SFD) posted its first quarterly profit in more than a year, with net income of $0.22 per share -- beating consensus estimates of $0.19 and rallying back from last year's loss of $0.74 per share.

But Smithfield's numbers weren't helped by slipping consumer demand for pork, which makes up two-thirds of the company's business.

Last month, Tyson Foods (TSN) also beat analysts' estimates, with first quarter net income of $160 million, or $0.42 a share (expectations had been $0.17), thanks to its chicken and beef divisions. It was a marked improvement over last year's net loss of $102 million, or $0.27 a share. But, like Smithfield, Tyson recorded a drop in pork sales.

Pork, however, only accounts for 12% of Tyson's meat portfolio.

Seaboard Corporation's (SEB) pork operations also faced stiff headwinds, losing $15 million in 2009 according to a report released yesterday, though it was a good deal better than the $46 million pork-related loss the outfit posted in 2008.

Hormel (HRL) also reported soft demand for pork, bacon, and ham while realizing strong gains in turkey.

Chicken and beef dominate the American dinner plate, with pork and fish running a distant third and fourth.

But why?

"Pork has worked for many years to try and change its image -- the whole premise behind The Other White Meat campaign was to position pork alongside chicken as a leaner product," Gary Truitt, president of Hoosier Ag Today, tells Minyanville. "Pork has historically had an unfortunate image as being high in fat, but with the new genetics and new feeds, we're breeding leaner, trimmer hogs."

The pork industry has also failed to "make pork exciting." Truitt says the chicken and beef industries have introduced new offerings, like chicken strips and flatiron steak, but "pork chops and ham sandwiches don't have the pizzazz to compete." He notes that "pork is just not as sexy as the other products in the meat case."

Regardless, Truitt is bullish on pork. "Feed costs are coming down somewhat, though the days of $2 corn are not coming back," he says. "The industry has to do some retooling to raise hogs profitably when corn is $3 to $3.50 a bushel. And they will. Additionally, the USDA supply and demand report that came out on Wednesday doesn't forecast corn trending much higher and should remain below $4," which also bodes well for pork producers.

"The rise in grain prices in 2008 created substantially higher feeding costs that forced farmers to cull their herd sizes," says Shawn Hackett, president of Hackett Financial Advisors, a firm with a focus on agricultural commodities. "That's no longer the case, with the downturn in wheat and corn prices, so we're in a pretty good situation now. The best situation since 2007, as a matter of fact. And since the herd sizes have gotten smaller and smaller and smaller, we're seeing demand start to exceed supply, which has caused futures prices to skyrocket 20% to 30%."

The figures do seem to show a nascent rebound. Bloomberg noted last week that wholesale pork prices, which hit a six-year low in August, have risen 48% since then.
So, what to make of the Smithfield, Tyson, and Seaboard reports of weakness in pork?

"Reading those reports is almost like looking in the rearview mirror," Hackett says. "Since they're generally released about 45 days after the end of the quarter, they still refer to conditions that were in place in the fall."

Hackett says the market is "starting to turn" and he is "looking at improved performance going forward. Future operations should see a very healthy improvement, which actually may hurt beef performance, believe it or not."

Believe it. The USDA estimates meatpackers will ship 2.1 million pounds of choice beef, the least since October 13, 2009. And retailers may reduce beef purchases after choice wholesale prices, which are more expensive than pork, rose to $1.5039 at the end of February, the highest level since April.

Steve Malakowsky, vice president of Agri-Business Capital at AgStar Financial Services, points to renewed demand in the Russian export market, the fifth-largest market for US pork, as a bullish sign, now that Russia has lifted import bans imposed after claiming to have found traces of banned antibiotics in shipments.

Dan Marti, an economist with the US Department of Agriculture's Economic Research Service, agrees.

"We believe Russia lifting restrictions will increase pork exports to a larger than projected level," he said.

But, while there's every logical reason to believe pork is poised for a run, there are still 7.3 million people living in the United States the pork industry will never, ever bring into the fold:

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