A Pork for Pork Program?

Includes: SFD, TSN
by: Jim Delaney

We hear the phrase “When pigs fly” when we’ve asked a question for which a simple, polite “no” is beyond the bounds of human compassion, or when someone is euphemistically trying to describe the very low probability of something occurring.

Unfortunately, anyone using that phrase has never watched what goes on in D.C. as there is so much pork flying around down there that if they flipped the Capital Dome over they could dip the Washington Monument in and use it like one of those contraptions on the boardwalk that makes cotton candy. Additionally, given that at least in the fairy tales, pigs are pink, you wouldn’t even need the F.D.A to get involved as no Red Dye #7 would be required.

One place that pigs definitely aren’t flying is off the pig farm. It’s getting so bad in states like Iowa that the politicians from there and others in the major swine producing states are asking for subsidies. I like to think of it as the “pork for pork program” (the acronymists out there can just call it the PPP). The request is to have the current administration pay for an additional $50MM worth of the porkers to be included in the nation’s food-assistance programs.

Glenn Grimes, an agricultural economist at the University of Missouri, predicts that producer losses between August of 2007 and the end of 2009 could reach $5BN. Prices at the wholesale level have fallen 21% in just the last four weeks alone.

Given what’s happened to the rest of the economy since 8/07, I’m not sure the name of the disaster should be changed from “credit crunch” to “pig punch” but $50MM can buy a lot of stuff, maybe even a name change.

One of the major problems for the producers is the fixed costs associated with their operations, as current genetics along with the environmentally “clean” methods now required to raise hogs means profits are only realizable when the facilities are running at full capacity. Volatility in feed and energy prices along with a flu that has “Swine” as its first name have all worked against profitability.

Tyson Foods Inc. (NYSE:TSN) and Smithfield Foods Inc. (NYSE:SFD) are the two names most affected by the pounding pork has taken. SFD was seeing a lazy move up in its stock price from the March lows while the CDS moved similarly to the downside, at least until a few weeks ago when a third attempt to get through the July 1st high of $14.14 failed pushing the stock to a recent low of $11.57 before closing last night at $11.86. It took a little over a month but the CDS began rising on the 5th of August from its low for the year (793bps) closing last night at 962bps.

TSN’s stock hit its high earlier than SFD, posting a $13.88 close on May 28th. The CDS reached what looked like its low for the year (170bps) on June 2nd. From there it was all down-hill for the stock and up-hill for the CDS until July 13th when the CDS began a move lower posting a new low for the year (160bps) on August 10th. The move in the CDS was not matched in the stock as TSN has remained range bound since 7/21, at between $11.00 – $11.84.

All of this raises questions for the porcine prospects without a pork prop up.