Source: MEATINGPLACE, 11/16/11

Smithfield Foods’ earnings will benefit from sustained demand for pork in 2012, while Sanderson Farms will return to profitability on rising chicken prices, said a Wall Street analyst who raised her forecasts for both companies.

Pork
Live hog prices remain more than 40 percent above levels last year after accelerating throughout October, even as production climbed more than 20 percent since mid-September, said BB&T Capital Markets analyst Heather Jones.

Broad-based strength in export demand, as well as surprisingly stable domestic demand, is driving the price gains, Jones said in a note to clients. South Korea hog futures are still double the value of equivalent U.S. prices even after declining 43 percent from a peak in early June.

Chinese pork prices are close to double that of American product, as well, she said, and there are reports that foot-and-mouth disease is affecting local supplies. The recently signed free trade agreement with South Korea should be very beneficial to the pork market, Jones added.

The combined U.S./Canadian breeding herd and market hog inventories are up only slightly from a year ago for the fall quarter, she said. Spot hog producer margins are slightly negative, while futures indicate producer profits close to breakeven through April 2012. She projects profitability about $2 to $3 per head better than that for Smithfield in second-half 2012.

Jones raised her full-year earnings estimate for Smithfield to $2.25 from $1.79 due to the improved live hog profitability.

Poultry
The average spot big bird producer saw prices rise nearly 5 percent last week, compared with a year ago, Jones said, citing EMI data.

“We expect the (year-over-year) increase to accelerate in coming weeks, as not only do comparisons ease dramatically, but the impact of tighter supplies should become more pronounced,” Jones said.

Average weights are moving in the right direction due to a broad-based decline in average weights across weight classes rather than a decline in big-bird slaughter, she said.

“Encouragingly, average weights in the big bird category were down 5 percent for this past week. We would expect that to continue,” she said.

While production is still too high relative to demand, it could reach equilibrium in December, she said. Sanderson has locked in feed needs through the first half of 2012, she added.

Jones reduced her fourth-quarter per-share earnings estimate for Sanderson to a loss of 63 cents from her earlier forecast for a loss of 58 cents. But she raised her 2012 forecast to a profit of $3.05 from $2.70 to reflect higher price projections in the first half.

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