Pork's Got No Beef With China and Russia

Look for pork producers like Smithfield Foods (NYSE: SFD  ) and Hormel Foods (NYSE: HRL  ) to squeal with delight as both China and Russia lift costly import bans previously imposed on U.S. pork products.

When pigs fly
China shut down its pork markets after swine flu got everyone in a tizzy -- not least because the virus was called "swine flu," even though pork itself was safe. Russia slammed the door shut when traces of antibiotics that are banned in the country turned up in its imports. While China agreed to open them again last October in principle, it was only last week that a more definitive agreement was reached.

And Russia said exporters can resume pork shipments so long as they can prove their products are antibiotic-free. Smithfield and Tyson (NYSE: TSN  ) have already been cleared to trade.

The doors can't creak open soon enough for the industry. China imported $700 million worth of pork products from the U.S. in 2008, but last year, in the wake of the ban, the industry saw American pork exports plummet 38%. Russia is one of the top five pork importers. It's also the largest foreign market for U.S. chicken, accounting for more than 75% of its import quotas, but poultry is still banned as both sides squawk over industry use of chlorine rinses.

Don't be pig-headed
Hog farmers resorted to thinning their herds as their losses grew, and the Agriculture Department says warehouse supplies are 17% below where they were a year ago, with just 516.8 million pounds of pork stored. This decreased supply helped boost hog futures to a 12-year high.

In addition, the National Pork Producers Council says America's reentry into China could add as much as $9 to the price of a pig.

China remains the world's largest consumer and producer of pork, but demand far outstrips supply. Zhongpin (Nasdaq: HOGS  ) and three other top pork processors account for less than 10% of the country's total market share.

Pigs in the parlor
Of course, you might think you were buying a pig in a poke if you compared the doom-and-gloom news of the industry with how U.S. meat processing companies were faring. Earlier this month, Smithfield reported its first quarterly profit in over a year, as losses on hog operations declined sharply. Gross margins jumped to 9.9% and pork operations saw earnings soar 18% as the company cut costs and thinned its herds.

Hormel also saw its first-quarter profit jump, shooting 37% higher as it processed fewer hogs than a year ago. Yet rising costs are also occurring sooner than anticipated and may pressure profit down the road. Hormel's a diversified meat products company, though, and its recent acquisition of the Country Crock side-dish line from Unilever (NYSE: UL  ) seeks to take advantage of the continuing growth of consumers eating in.

A greased pig
While losses in hog operations are narrowing for Smithfield and even Seaboard (NYSE: SEB  ) and Tyson is actually growing profit, it's Smithfield that would probably be the biggest beneficiary of improved trade relations with China and Russia, as it derives nearly all of its sales from hog-derived products.

As export markets normalize, hog prices rise, and previous cost-cutting initiatives make operations leaner, I'm looking for Smithfield Foods to be the one that brings home the bacon.

Looking for good companies who properly incentivize their managers to boost your returns? Jim Royal shows us some to watch out for.

Unilever is a Motley Fool Global Gains recommendation and an Income Investor selection. Try any of our Foolish newsletter services today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


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