Will 2013 Prove to Be a Great Year to Invest in Pork?

It's not just the recently-agreed-upon "fiscal cliff" deal that's laden with pork, but rather, pig and poultry farmers themselves are feeding at the trough of deeper pockets.

Darn skippy!
Privately-held pork processor Gusto is getting bought out by Butterball turkey farmer Seaboard (NYSEMKT: SEB  ) in a deal where the financials weren't disclosed , while meat and pork products maker Hormel Foods (NYSE: HRL  ) is buying Skippy peanut butter from Unilever (NYSE: UL  ) for $700 million in cash .

Pork remains big business. According to data from the USDA, and compiled by the U.S. Meat Export Federation, October was the best month for pork exports that the industry has ever seen, with export volumes rising 9% over the year-ago period. More than 218,000 metric tons worth $607 million were exported that month, which is the latest data available. One metric ton equals 2,204.622 pounds .

That was able to offset slightly weaker domestic consumption of pork in October, despite prices coming down by almost 2%. The National Hog Farmer says real per capita expenditures on pork in October fell half a percent but, considering the state of the economy, it was much better than anticipated.

Going whole hog
Around 70% of Hormel's business revolves around pork products, with another 20% coming from turkey . Seabord derives 30% of its revenues from pork and, while the Gusto acquisition doesn't mean Butterball will be expanding into pork processing, it will give the turkey farmer access to its 260,000-square foot processing facility that will help expand the Butterball brand.

Perhaps best known for its chickens, Tyson Foods (NYSE: TSN  ) is also a large pork processor, generating 16% of its revenues from the division. It was the only segment that enjoyed increasing sales volumes last year, and the one that contributed the highest profit margins , even though prices fell.

It was a different situation at Smithfield Foods (UNKNOWN: SFD.DL2  ) , the world's largest hog producer and pork processor. While pork sales were down about 2.5% year over year last quarter, profits on pork grew 13% from 2011 .

Slippery as a greased pig
Yet, if conditions remain as they are, it's understandable why there's movement afoot to diversify more. Butterball wants to be able to sell more turkey; Hormel wants to add to its non-meat protein business. They're not greasing the skids for more pork, but rather, using pork as the leverage to gain access to new and varied markets. That means the international markets will be the best targets for growth.

China remains the biggest one for pigs and pork products. The country is both the largest producer and biggest consumer of pork worldwide, with pork accounting for 64% of all meat consumed in 2011 . Analysts predict it will experience a 19% growth rate in production through 2016, as pig farmers continue adopting western-style farming practices . Zhongpin (UNKNOWN: HOGS.DL  ) , the leading pig farmer, says its more profitable than its rivals because it uses an "industrial cluster approach" to farming, though many remain doubtful of its claims.

Still, its stock rose more than 52% last year, marking a better performance than its U.S. rivals. Seaboard and poultry farmer Pilgrim's Pride (NASDAQ: PPC  ) were happy as pigs in -- well, they had the best performance, rising 28% in 2012, while Hormel rose only 11%. Tyson, on the other hand, fell 3%, and Smithfield was down 8%.

Bringing home the bacon
Regardless, I'd look for an improving economy and higher prices in 2013 to bolster their efforts and move their stocks higher. Zhongpin has accepted management's plan to go private -- the Chinese government is encouraging Chinese businesses to abandon U.S. equity markets -- so investors will have to concentrate their efforts mostly on domestic producers. If they want an international flavor to their pork portfolio, they'll have to accept Mexican producer Industrias Bachoco (NYSE: IBA  ) or Brazil's Brasil Foods (NYSE: BRFS  ) .

Farmers should start enjoying higher prices soon, as some analysts contend there will be a bacon shortage this year (horrors!). Last year's drought caused not only higher commodity prices, but led farmers to slaughter pigs at record numbers (which led to the weak price environment ). While it seems everything comes bacon-flavored these days, commodity prices have stabilized, and production should be in deficit , which should lead to lip-smacking returns, and suggests it's time for investors to talk turkey.

I wager that industry heavyweight Smithfield Foods -- the company that fell the farthest -- will lead a recovery this year; but let me know in the comments box below which pork processors you think will have investors squealing with delight.

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  • Report this Comment On January 06, 2013, at 2:22 PM, 153fish wrote:

    "Zhongpin (NASDAQ: HOGS ) , the leading pig farmer, "

    Zhongpin is primarily a pork processor. While they have some small JV upstream operations in pig raising, it is a very small part of their overall operations

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