Shoppers who buy meat produced by Hormel Foods Corp. should expect to see higher prices in the coming year, thanks to the rising cost of livestock feed.
Minnesota-based Hormel has warned that high grain prices resulting from this summer's drought will be a drag on next year's profits and that, in turn, likely will lead the company to modestly raise prices on some products.
When officials at the Austin food company foresaw headwinds, despite a predicted 13-percent growth in fourth quarter earnings, investors weren't happy. One Wall Street analyst downgraded the company's stock from a buy to a sell and the share price ended the day Tuesday down 4 percent to about $30 a share.
In a conference call with investors, Hormel CEO Jeff Ettinger said the company's net income for the 2012 fiscal year increased 5 percent over last year, on sales of more than $8 billion. But that growth in the bottom line is down sharply from the previous year, when, earnings jumped 16 percent.
“This is going to hit consumers for their staples... Their meat, their dairy, their eggs, their poultry.”Ricky Volpe, USDA research economist
DROUGHT AND ECONOMIC RECOVERY
Ettinger said the decline reflects the effects of the drought and the slow economic recovery.
"The image I'm picturing is sputtering, but that's more negative than I want to really get across," Ettinger said.
Etttinger said the food business is moving forward, but taking a step backwards for every two steps forward. He traced the company's outlook to sharp gasoline price hikes earlier this year that reduced consumer spending.That was followed by the drought which caused grain prices and Hormel's feed costs, to spike.
As a result, it will cost the company a lot more to raise turkeys over the next 12 months.
"I can give you a ballpark of $50 to $100 million," Ettinger said of the company's higher costs. "When you look at what the core grains have gone up post-drought, it's certainly a significant amount of money."
Both corn and soybean prices were in record territory last summer before backing off a little from those highs.
Ettinger said the higher feed costs will show up in the grocery store. He wasn't specific, but said consumers can expect modest price increases on some Hormel products.
Drought damage is forcing prices higher on nearly all grain-based foods, said Ricky Volpe, a research economist with the U.S. Department of Agriculture.
"This is going to hit consumers for their staples," he said. "Their meat, their dairy, their eggs, their poultry."
Volpe said most of the price rise is still ahead. Some meat prices, especially pork, dropped when the drought took hold because many farmers sold parts of their herd to reduce their feed bill when grain prices exploded.
The pork oversupply sent grocery prices down temporarily. But Volpe said the situation with pork and other food products has now reversed, and all indexes are rising.
"We expect to see all meat prices, beef, veal, pork, poultry and also eggs and dairy products, all of these prices [to] follow an upward path, inflate, basically through the end of 2013," Volpe said.
Beef could rise as much as five percent, poultry and pork up to three and a half percent.
FEED COSTS INCREASE
For farmers, it's been tough to deal with the high grain prices.
Minnesota turkey producer John Burkel said the high feed costs have him looking hard for a silver lining as he won't make any money on his turkey business this year.
"I paid for a lot of good exercise, that's the way I looked at it," Burkel said.
Like Hormel, Burkel and other livestock producers in Minnesota are trying to find ways to cut costs and clear a profit in the face of their rising feed bills.
Good crops next summer would help more than anything else by boosting grain supplies. But for now at least, drought conditions are still in place across most of the Midwest.