Meat processor IBP Inc. said profits fell 61 percent in the second quarter as tight supplies of hogs pushed up costs in its pork business.
The world's largest fresh beef and pork producer said it earned $33.9 million or 36 cents a share in the quarter ended on June 28, down from $87.0 million or 90 cents a share a year earlier. Sales rose 6 percent to $3.45 billion from $3.26 billion.
Analysts had expected a drop in second-quarter earnings but said the results were even lower than anticipated.
"It's disappointing that they didn't do better," Deutsche Morgan Grenfell analyst Timothy Ramey said. "They lost money in pork -- more money in the second quarter than in the first quarter."
The company, based in Dakota City, Neb., said its fresh meats results were hurt by tight hog supplies and excess pork processing capacity. Live hog prices during the second quarter jumped near their highest level in recent years.
To address that problem in the future, IBP said it would become more involved in hog raising.
"We believe we must align ourselves closer to pork production," Chairman Robert Peterson said in a statement. "This will give us better access to hog supplies," he said, adding it will give the company more control over quality.
IBP said that while most of the hogs it now buys are purchased daily for cash, it has increased its purchases through marketing agreements and contracts in recent years.
The company said it was also committed to becoming more directly involved in hog production to supplement its primary supplies from independent producers.
Hog production would make IBP vertically integrated -- involved in every step from raising hogs to slaughtering the animals, processing the meat and marketing branded pork products to retail grocers and foodservice customers.
Smithfield Foods Inc. is among the other meat processors that are already involved in hog production.
"I think it's the trend that's going to happen," Piper Jaffray analyst George Dahlman said of the moves toward vertical integration in hog processing.
"IBP's got the financial stability and capability to do it. It's the only way, I think, the processors are going to be able to control quantity and quality of supply."
IBP said its beef plants were more profitable in the second quarter than the first. But the performance weakened from a year earlier when the export market was stronger and livestock supplies better.
The company said live cattle prices were 11 percent higher in the latest quarter than a year ago.
Meat Industry Insights News Service
P.O. Box 553
Northport, NY 11768
Phone: 631-757-4010
Fax: 631-757-4060
E-mail: sflanagan@sprintmail.com
Web Site: http://www.spcnetwork.com/mii