SMITHFIELD, VA. — Difficult operating environments in its Hog Production and Fresh Pork business units led Smithfield Foods, Inc., to incur a loss of $107.7 million during the first quarter ended Aug. 2. The company recorded a loss of $13.2 million for the same period of the previous year.
Sales for the quarter were $2,715 million compared with sales of $3,141 million for the first quarter of fiscal 2009.
"This first-quarter loss reflects the continuing adverse business environment in the Hog Production segment of the company’s operations," said C. Larry Pope, president and chief executive officer. "While raising costs have continued to decline and the pork processing segment continues to deliver strong profits, they were not sufficient to offset the negative impact of low hog prices on the Hog Production business. The sharply lower hog prices reflect the impact of the A(H1N1) outbreak at the end of the prior quarter and softer export demand."
The Hog Production business incurred a loss of $162 million during the first quarter. Live hog market prices in the United States decreased 24% to $42 per cwt compared with $55 per cwt in the same quarter last year, due to an oversupply of live hogs in the United States. Domestic raising costs decreased from the prior year and the fourth quarter of fiscal 2009. Domestic raising costs decreased to $59 per cwt from $61 per cwt in the prior year and $63 per cwt in the fourth quarter of fiscal 2009. The quarter's loss included a non-cash impairment charge of $34 million related to the write-down of farm assets of non-core hog operations in which the company is ceasing production or offering the farms for sale.
Weakness in volumes, average unit selling prices and margins throughout much of the first quarter led to a $6.8 million loss in the company’s Fresh Pork business. First-quarter results were the direct result of lower exports and a modest drop in domestic food service demand as a result of the recession, according to the company. The company said the business unit returned to profitability late in the quarter and continues to be solidly profitable in the early weeks of the second quarter.
Smithfield’s Packaged Meats business recorded strong profits in the first quarter with an operating profit of $107.8 million, according to the company. Pricing initiatives and rationalization of unprofitable business pushed margins higher despite a 9% reduction in sales volume and $6 million in charges related to the company’s restructuring effort. Operating results were nearly $74 million higher than the prior year results. Results benefited from permanent improvements in operating efficiencies and plant utilization, as well as reduced raw material costs.
"The hog production industry will very likely continue to incur losses until an industry-wide liquidation occurs," Mr. Pope said. "With current live hog market prices substantially below raisings costs for the foreseeable future, we believe the industry has finally reached an inflection point where liquidation must occur. In response to these industry dynamics, we have altered our hog production strategy by modestly reducing our exposure to commodity hog and grain markets through sow reductions and farm closings.
"On the other hand, our Packaged Meats business continues to achieve record profits. This has been our focus for several years. Once the Pork Group restructuring plan is complete, we expect incremental improvement in packaged meats profits of approximately $80 million annually by fiscal 2011."