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Hog-wild pork costs force Hormel to raise prices, guard margins

Hormel Foods Corp. is raising prices in an attempt to insulate its profit margins from higher prices and wild swings in the pork market as a result of African swine fever, or ASF, its top executive said May 23.

The company cut its full-year 2019 guidance on as it raised prices on both shelf-stable and refrigerated pork items. Pork is a key ingredient for Hormel products including SPAM luncheon meat as well as Hormel Bacon.

Hormel said that global prices for pork shot up during the 13 weeks through April 28, the end date for its fiscal second quarter. Prices for lean hogs on the Chicago Mercantile Exchange rose roughly 43% over the same period, with futures contracts suggesting that prices will remain high into the fall months, according to S&P Global Market Intelligence. Despite the rising pork prices, Hormel's second-quarter earnings still managed to beat most analyst estimates.

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ASF, which has spread among hog herds in China, has yet to appear in North American livestock. Still, it represents "the biggest unknown in the protein industry," Chairman, President and CEO James Snee told analysts during a call to discuss the company's fiscal second-quarter earnings. While many in the industry expect prices to remain high in the coming months, uncertainty about exactly how many hogs have been removed from the market in China, as well as how much pork Chinese suppliers have stored, has made pork-related futures volatile, the executive said.

"We expect similar periods of margin pressure as markets move higher in the back half of 2019," Snee told analysts.

At grocery stores and other food retailers, Hormel will implement price increases by the end of the company's third quarter, Snee said, adding that Hormel will is able to push through higher prices much faster — within two weeks — at its food service business.

Sales volumes at Hormel could suffer as a result of price increases, Snee warned, but he added that the company will be able to widen margins again once pork prices stabilize.

"Once we get to a new level that becomes more stabilized, then that's [when] we'll get margins back to normalized levels," the CEO said.

Shares of Hormel were down more than 4% in morning trading May 23 before recovering the loss by midday. Shares were 1.7% lower at $38.81 in early afternoon trade.

Hormel's outlook on ASF and higher pork prices differs from that of rival Tyson Foods Inc., which sources, processes and sells raw meat in addition to processed pork products.

In early May, executives at Arkansas-based Tyson said that their company would benefit from rising hog prices in 2020 as Chinese suppliers turned to the U.S. for pork as well as other proteins, such as chicken and beef, to replace depleted Chinese stocks. At the same time, margins at Tyson's processed foods business, which accounts for a smaller share of revenue than the sum of its raw pork, chicken and beef segments, could shrink as a result of higher pork prices, the executives said.