Hormel signals higher prices for bacon amid soaring demand

Bacon is beyond trendy, beyond the flavor of the moment. It's shaking up the food business.

When Hormel Food Corp. reported its latest results on Thursday, its executives described the upheaval in pork the way those in the high-tech world talk about the frenzy to get parts for smartphones or game machines.

Demand is so high for bacon that farmers can't raise enough pigs fast enough to meet it. That has sent the price of pork bellies soaring, more than doubling since April. And food makers like Hormel haven't been able to pass along those costs to retailers and, ultimately, consumers fast enough. Some, including Hormel, are also spending on plants to deliver more bacon in the future.

"These are unprecedented changes in the hog industry," Jim Snee, Hormel's chief executive, told investment analysts. "We're watching them closely."

They come as the Austin, Minn.-based company continues to struggle with a drop in demand for turkey, which has led to a plunge in prices for turkey-related products.

For Hormel, one of the nation's top producers of bacon and turkey, the overall effect was a 7 percent drop in profit for the May-to-July quarter, the third of its fiscal year, and a warning that August-to-October profit would also be under pressure.

The news sent Hormel shares down 5 percent.

"What you have here is a number of the key commodity markets not working in favor of them," said Brittany Weissman, analyst at Edward Jones in St. Louis. "There really is no [profit] offset."

Executives said they had "communicated price increases" in products that use pork bellies, pork trim and beef trim that have seen the biggest increase in cost this year. But because of the time it takes to work through existing inventories in warehouses and stores, the company doesn't expect to reap the benefit and end the profit squeeze until October.

It's difficult to tell when or how consumers will feel the effect of Hormel's effort to raise prices. "Pricing actions can mean a lot of things and do not necessarily mean consumers will see an increase in the price on shelf," the company said in response to a request for examples of likely price hikes.

Hormel said it earned $182.6 million, or 34 cents a diluted share, in the three months ended July 30. That's down from $195.8 million, or 36 cents a year ago. Analysts had forecast per-share earnings of 37 cents for the latest period. Sales fell 4 percent to $2.2 billion.

Separately, Hormel announced it was spending $104 million to acquire Cidade do Sol, a Brazilian meat company that sells goods under the Ceratti brand. That deal comes just a week after Hormel purchased Fontanini Italian Meats and Sausages, a Chicago-based maker of Italian meats for restaurants.

Hormel's latest results were also dented by the underperformance of Muscle Milk, the ready-to-drink protein product it spent heavily to promote in recent months. Snee said the marketing push didn't deliver the double-digit sales growth executives were expecting.

The company's turkey division, called Jennie-O Turkey Store, remained under pressure with a 9 percent decline in revenue and 20 percent decline in operating profit. Snee said turkey producers were discounting prices to reach consumers who, in some cases, appeared to be shifting away from turkey to other meats.

Hormel's grocery products unit — which includes Skippy peanut butter, Wholly Guacamole dips and Justin's nut butters and candy — experienced a 6 percent jump in sales and 10 percent jump in profit.

But the company gets about half of its revenue and profit from the refrigerated foods business that is chiefly shaped by trends in hog and beef markets. Snee said four of the top seven ingredient inputs at Hormel are experiencing record prices, shaped mainly by the inability of supply to keep up with demand. Bacon sales by volume and revenue were "absolutely great" in the latest quarter, he said.

Executives' confidence in riding out the cost and price volatility in pork is high enough that they announced earlier this month a $130 million expansion of the plant in Kansas where Hormel makes its precooked Bacon 1 product. Even with that and investments in pork facilities by some of its competitors, Hormel executives said they are not worried that the industry will be making too much bacon anytime soon.

Evan Ramstad • 612-673-4241