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By Bob Burgdorfer
CHICAGO, June 5 (Reuters) - Smithfield Foods Inc. SFD.N posted a sharply lower profit on Thursday as losses in the hog unit, due in part to high feed prices, outweighed better results in its meat operations, and its shares fell more than 5 percent.
Smithfield is the nation’s largest hog producer and like other livestock and meat producers it has been hurt by much higher feed costs. The price of corn, an important feed, has surpassed a record $6 per bushel amid demand by livestock producers, grain exporters, and makers of the biofuel ethanol.
To cope, Smithfield is reducing hog production and has focused on producing more profitable packaged foods.
Earnings for the fourth quarter ended April 27 were $2.4 million, or 2 cents per share, compared with year-earlier results of $37.1 million, or 33 cents per share.
Results included after-tax income from discontinued operations of $0.6 million, or 1 cent per share.
Wall Street analysts on average expected 5 cents per share, according to Reuters Estimates.
In addition to the after-tax income, the quarter included other one-time gains and charges, which the company said were largely neutral to overall results.
Wachovia food analyst Jonathan Feeney called the results “disappointing”, but remained positive for longer term results due in part to better results on meat sales.
“In these numbers, (hog) production was much worse and (meat) processing was a little better,” Feeney said in a research note. “Now hog supply reductions are more needed than ever.”
Revenue for the period was $2.87 billion, compared with $2.39 billion a year ago. This year’s results reflect revenue from Premium Standard Farms, a smaller rival Smithfield bought in May 2007.
The hog unit had an operating loss of $129 million, compared with a year earlier profit of $40.6 million, due to lower hog prices and higher production costs.
“These were enormously difficult conditions,” Chief Executive Larry Pope said of the hog business.
A loss on hogs had been expected and the company has responded by reducing production. It previously said it will reduce its sow herd by 4 to 5 percent, and during Thursday’s conference call with analysts the company said a 10 percent reduction industry wide is needed.
“The bottom line is that feed costs are going to go up and the hog numbers are going to go down,” Chairman Joseph Luter said in the call. “The industry just cannot sustain itself in the current environment.”
Pope said the company has been raising meat prices to offset the rise in feed prices.
Smithfield said hog prices averaged $42 per hundredweight during the quarter versus $47 a year earlier, while it cost $54 per hundredweight to raise them versus $46 a year earlier.
The pork unit, which includes fresh and packaged meats, earned $138.5 million, up from from $78.5 million a year earlier, due to better sales of such items as bacon and pre-cooked meat entrees plus strong exports of fresh pork.
“We have been successful in our strategic focus on converting raw materials to more value-added convenience products and driving margin expansion,” Pope said.
To improve earnings, Smithfield Foods, like other meat companies, has been working to convert more of its fresh meats into higher-priced and more profitable packaged foods.
In addition to hogs and pork, Smithfield produces beef and Butterball brand turkeys and is part owner of the nation’s largest cattle feeding business.
Its beef and cattle feeding operations are now classified as discontinued operations because in March it agreed to sell those units for $565 million to Brazilian meat company JBS S.A. (JBSS3.SA). That deal is awaiting approval by U.S. regulators.
Smithfield shares fell to a one-month low of $28.22 Thursday morning and later were down $1.73 or 5.74 percent, at $28.40 at the New York Stock Exchange. (Reporting by Bob Burgdorfer, editing by Dave Zimmerman)