Smithfield Foods Inc. on Thursday posted a smaller third-quarter loss than was expected as healthy margins on packaged meat helped offset substantial losses on hog production due to record-high feed costs.

Its shares soared 18 percent in midday New York Stock Exchange trading, climbing $1.06 to $7.01, as Smithfield predicted it would have a better year in fiscal 2010 after it works through one more quarter of hog production woes.

"Looking forward, I fully expect the fourth quarter to be another difficult quarter with continued substantial losses in hog production. However, I am reasonably optimistic about fiscal 2010 in spite of the current recession," Smithfield Chief Executive C. Larry Pope said in a news release.

Smithfield, the country's largest hog producer, reported a net loss of $103.1 million, or 72 cents per share, in the fiscal third quarter ended Feb. 1, compared with a net profit of $54.5 million, or 41 cent a share, in the same period a year ago.

Smithfield last month said it would close six plants by December 2009 and eliminate 1,800 jobs as it restructured its pork group.

Excluding restructuring and other charges, the Smithfield, Virginia-based company said it lost $21.4 million, or 15 cents per share, in the latest third quarter. Wall Street analysts on average had expected a loss of 30 cents per share excluding special items, according to Thomson Reuters.

Third-quarter sales rose to $3.3 billion from $3.1 billion a year ago.

Hog losses deepen

Smithfield reported an operating loss of $253.6 million in its hog production unit in the latest quarter, compared with a loss of $80.7 million in the same period a year ago.

The domestic cost of raising hogs rose to $62 per hundredweight from $49 per hundredweight a year earlier, it said. At the same time, U.S. live hog market prices remained low at $40 per hundredweight, compared to $37 per hundredweight last year.

"This third quarter and the last nine months were clearly the most difficult in Smithfield's history," Pope told analysts on a conference call.

"I think we are going to have additional hog losses and I think we are going to have nice pork profits in the fourth quarter," he said on the call.

Grain prices have dropped sharply from last summer's record-high levels, and pig-raising costs will start to reflect cheaper corn prices in the first quarter of fiscal 2010, Smithfield said. However, it also said it locked in availability through the end of this fiscal year at over $6 per bushel, well above current market prices.

In the past year, the company's Murphy-Brown hog production unit liquidated 10 percent of its U.S. sow herd, Smithfield said, resulting in 100,000 fewer sows and reducing production of market hogs by about 2 million annually starting in fiscal 2010.

"We absolutely need to have some further reduction in the supply. We've taken the lead," Pope said on the conference call. "We need more supply contraction, and even with these big losses it does not seem the producers out there have heard this message."

Smithfield said it earned record margins in the latest quarter in its packaged meats business, which includes ham, bacon and sausage, and expects those margins to widen further. Export demand in several markets was significantly stronger than a year ago, the company said.

Smithfield said it has negotiated covenant amendments to its revolving credit lines with lenders and ended the quarter with $960 million in available liquidity.

The company said it has a debt to capitalization ratio of 53 percent after reducing overall indebtedness by over $700 million since the fourth quarter of fiscal 2008, including more than $300 million in the third quarter.

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