For meatpackers, it's getting harder to make a buck off bacon.
U.S. pork companies are paying more for the hogs they buy from farmers and are exporting less meat to China, the world's largest consumer of pork, pressuring profits for some of the largest U.S. processors.
Companies such as Tyson Foods Inc., the largest U.S. meat supplier by sales, and Seaboard Corp. reported declining quarterly operating margins for their pork businesses in August. WH Group, the Hong Kong-based owner of Smithfield Foods Inc., said last month that high retail pork prices could weaken demand in the U.S. as household budgets are squeezed.
Meat processors had enjoyed record profit margins over the past two years as consumer demand soared, while staffing shortages at plants limited processing capacity, reducing supplies and pushing prices higher, executives have said.
Now, rising prices are catching up with the roughly $43 billion U.S. pork industry. Consumer demand for pork is weakening, while rising costs for grain, fuel and other supplies are leading hog farmers to shrink the size of their herds, industry analysts and executives have said. That is raising the prices that pork processors pay to secure livestock and weighing on their bottom lines. Pork processor profit margins overall are down an estimated 70% for August compared with a year earlier, according to the investment firm Stephens Inc.
"Probably the most softness we had was in the area of bacon," said James Snee, chief executive of Hormel Foods Corp., a major supplier of pork products. "A lot of that would be tied to the [pork] belly market and some of the escalated pricing that we saw throughout the quarter," he said on a call with analysts on Thursday.
Seaboard, one of the largest pork producers in the U.S., said its operating income fell by $162 million for the first six months of 2022 because of lower profit margins on its pork products, as well as higher feed and processing costs.
Tyson Foods in August lowered the profit forecast for its pork business for the fiscal year, after reporting a 2.4% quarterly decline in pork operating income. The Arkansas company said its pork sales volumes declined about 2% as high retail prices cut into demand, while a strong U.S. dollar made pork even more expensive abroad.
Tyson Chief Executive Donnie King said on an August call with analysts that the company expects tight hog supplies and declining export demand to continue to affect its sales volumes for the rest of the year.
Part of meatpackers' challenge is that hogs are getting scarcer and more expensive. Near Winthrop, Iowa, Trish Cook and her husband Aaron raise about 35,000 pigs a year. Wages for their four farmworkers, as well as the cost of farm equipment and livestock feed, have all gone up, they said. Those increases have been more than offset by what packers, including Tyson Foods, are willing to pay for their pigs, they said.
The couple was turning a $50 profit on each pig in early August, higher than a normal year and above the $40 a pig profit the couple made during the same time a year ago, they said.
Still, Ms. Cook said the couple is hesitant to grow the size of their herd.
"It's tempting to expand, but we have no plans," said Ms. Cook. "Building costs are crazy high, I think people are just being cautious."
Farms had about 72.5 million hogs in June, down 1% from the same time a year earlier, according to the most recent data available from the Agriculture Department. The USDA said in August that pork production for 2022 is expected to decline 2% from a year earlier and hog prices this year should be about 10% higher than in 2021, the department said.
Pork cutout prices, or what packers ship to their grocery store customers, are down 1% while lean hog prices are up 10% for August, compared with a year earlier, according to Stephens.
"Hog prices are going up by more than pork prices," said Ben Bienvenu, a food and agribusiness research analyst at Stephens.
Some pork processors, including Smithfield, own the hogs in their supply chain, rather than buying them off the open market from independent farmers for higher prices. That gives the company an advantage, said Jim Monroe, a Smithfield spokesman.
"Hog supplies are decreasing," said Mr. Monroe. "Our vertically integrated model offsets some of this challenge."
Meatpackers are also struggling with high fuel, labor and utility costs at their plants, company officials said. Smithfield, the largest U.S. pork producer, closed in June a 1,800-person plant in Vernon, Calif., citing higher taxes, utility costs and labor costs in the state compared with other areas where it operates.
U.S. pork export volumes to China were down 68% in the first six months of the year, compared with the same period in 2021, according to the USDA.
Driving the decline in exports is a rebuilt hog population in China after herds there were devastated by an African swine fever outbreak in 2018, according to pork industry officials. The outbreak forced hog producers to cull roughly 40% of China's hog population. WH Group said the number of hogs it processed in China increased 31% for the first half of this year.
Covid-19 shutdowns in China have also hurt demand for pork imports this year, said Maria Zieba, the vice president of international affairs for the National Pork Producers Council, a trade group. The NPPC is pushing the U.S. to ship more pork to countries such as the Philippines and Vietnam, she said.
Chinese tariffs on U.S. pork are also making it more expensive for importers, hurting demand and giving China a reason to import pork from other countries, she said.
"It's not completely surprising given where we are geopolitically," Ms. Zieba said. "We're not the country they are going to go to buy from."
Par: Patrick Thomas (06/09/2022)
Source: Dow Jones & Company, Inc. via Foodmarket newsletter (Urner Barry)