Source:  Rita Jane Gabbett, MEATINGPLACE.COM, 7/17/09

BMO Capital Markets downgraded its stock recommendation for Smithfield Foods to "market perform" from "outperform" based in part on concern that recently lowered feedgrain prices may keep more hog producers in the business.

"Our case for aggressively investing in SFD is less persuasive given the rebound in (Smithfield's) stock price and the potential for smaller-than-expected hog liquidation," analyst Kenneth Zaslow wrote in a note to investors. "While a smaller hog liquidation would cushion near-term earnings (i.e., limit the oversupply of hogs), it would dampen the magnitude and duration of the recovery.

"Ironically, we would prefer higher corn prices to ensure that the severe hog production losses would create bankruptcies (to be clear, not Smithfield) in the hog industry and a meaningful hog liquidation that would produce years of strong profitability."

New crop corn prices have dropped nearly 30 percent in the last six weeks. Zaslow estimated that while hog prices will remain below breakeven for the rest of 2009, hog production margins could rebound to above breakeven by early next year.

"Nevertheless, we still believe that the worst is past for (Smithfield), and sow liquidation — albeit potentially smaller than our initial expectations — will occur," he noted. Zaslow also predicted a rebound in pork exports to Mexico and Japan, reflecting the temporary nature of H1N1-related declines.

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