Source:  Rita Jane Gabbett, MEATINGPLACE.COM, 6/9/09

BMO Capital Markets analyst Kenneth Zaslow lowered his fiscal 2010 earnings forecast for Smithfield Foods for the second time in three weeks, citing the severe correction in hog futures, weakening hog margins and the likelihood that future debt offerings will carry a higher interest rate.

For fiscal year ending in May, 2010, Zaslow reduced his earnings forecast to 18 cents per share from 99 cents per share forecast in late May and his forecast before that of $1.30 per share.

Bankruptcies, liquidations

Two years of losses, rising feed prices and ebbing export demand (in part due to unfounded fears from the H1N1 virus) are bound to force bankruptcies and hog herd liquidations, especially by smaller producers, according to industry analysts. In fact, a group of producers last week announced a program to help each other get out of the business.

Zaslow predicted hog margins will remain below breakeven for the next two to three quarters.

Producers are bleeding red ink at a time of year when they should be making money," economist Steve Meyer and the Steiner Consulting Group wrote in the CME Group's Daily Livestock Report. "It seems that the industry has concluded that there is simply too much production capacity and that prices will remain weak unless significant steps are taken to reduce the breeding herd."

Down, not out

Smithfield and the hog industry may be down, but they are not out.

"Despite severely weakening hog margins, we remain confident that there is no need to write SFD's eulogy," Zaslow wrote in a note to investors. "The hog industry may finally be following the path to recovery that the chicken industry endured late last year."

Plus, Smithfield's pork processing business may provide a buffer to production losses in fiscal 2010, he added.