Smithfield's ROI

Smithfield Foods Chairman and CEO Joe Luter III likes to point out that his company offers a better return on investment than the S&P 500.

A $100 bill invested in Smithfield stock 15 years ago earned an 18% return ($1,194), while the S&P 500 provided an 8.4% return ($336). A $100 investment in the stock 28 years ago realized a 25.6% ($57,600) rate of return.

The lower performance in recent years is due to Smithfield's extraordinary growth in the past decade, Luter told a Consumer Analysts of New York group last month. The Virginia-based pork producer/processor has roughly doubled in size in just the last four years.

Smithfield ranks as the No. 1 pork packer in the United States, processing 20% of the U.S. market (19.3 million hogs). They are No. 1 worldwide in pork production with 14.7 million hogs — 13% of the U.S. market share. Smithfield ranks fifth in beef processing with 7% of U.S. slaughter.

Domestic sales totaled $8 billion, international sales $1.3 billion in 2002. Processed meats make up 32% of the sales' dollar, 26% beef and 25% fresh pork. Processed meats, like bacon, sausage, and ham, have grown 400% in the last decade and currently account for 53% of sales revenue. Hogs sold to other processors make up 15% of total sales.

Smithfield's hog production group lost $19.3 million in the first six months of their current fiscal year, and the trend is continuing through the third quarter. Last year, the group made $223 million.

The difference is simple — low hog prices. “People think I'm crazy, but I like low hog prices,” says Luter. “There is pain for a short time, but each time we go through one of these cycles, we emerge stronger than we were before the downturn.

“The industry is not well capitalized, so high-cost, inefficient producers cut back or go out of business in a loss situation. Just a 5% reduction in hog numbers sometimes means a doubling of hog prices,” he adds.

Luter estimates pork production will be down 3% this year, with beef production down 4-5% and poultry down 2-3%. He expects prices, on the other hand, to increase 15-20%.

Luter on Industry Issues

• Smithfield's case-ready products: “Case-ready hasn't grown as fast as we expected, and there is overcapacity in this segment. Frankly, I don't think anyone is profitable yet in case-ready meats. But the trend is coming and it will drive costs out of the system.”

• The impact the country of origin labeling (COOL) law on Smithfield: Luter says COOL is “bad public policy,” but expects it will help his company, rather than hurt it. Why? “Because it will keep Canadian pigs out of the U.S.,” he says. “When the law goes into effect, farmers will have to trace and certify origin of their pigs.” Canadian pigs will have to be kept separate on the farm, at the packing plant and on the cutting floor, dramatically increasing costs. He says Smithfield will probably refuse to buy pigs of Canadian origin. “The law is ill-conceived, it's all politics, and it's going to hurt the very people it was designed to help,” he adds.

The Hog Side: Five-Year Goals

The hog production side of the growing Smithfield Foods empire consists of Murphy-Brown East and Murphy-Brown West. U.S. sows total 753,223, with production units in 12 states turning out 13.6 million market hogs. Another 80,577 sows are managed in Mexico, Brazil and Poland.

Hog Production Group President Jerry Godwin provided some company production figures and compared them to an industry average (source unknown) and their five-year goals (Table 1).

Godwin believes the trend in pigs weaned/litter is a key component of improved performance — “driving progress towards enhanced efficiency of the industry.”

Two major inputs into their production system are feed and superior genetics. Every dose of semen collected at their boar studs is identified by bar code to monitor productivity. Every animal is identified in a database that tracks lifetime productivity. Genetic lines are tracked to produce pigs for designated product streams. Different gene combinations target international markets, primarily Japan.

“Being a leader in genetics is essential for being a leader in this business. We are the only company integrated through genetic supply, which gives us an undisputed advantage,” he says.

Table 1. Murphy-Brown Production