Pig virus squeezes Hillshire profits; sausage prices to increase

By Michael Hirtzer

CHICAGO (Reuters) - Hillshire Brands Co (HSH.N) said this week that cases of a virus deadly to baby piglets were growing and the company was increasing meat prices to combat rising commodity costs tied to the disease.

The Chicago-based maker of Jimmy Dean sausages and Ball Park hot dogs was one of the first companies to state publicly that the porcine epidemic diarrhoea virus, or PEDv, was hurting its bottom line - and it will not be the last, analysts said.

Hillshire's net sales increased 1 percent to $984 million (617.7 million pounds), but operating income declined by 35 percent, pressuring margins.

"As we've moved into the second quarter, we've begun to take additional pricing actions," Hillshire President Sean Connolly said, adding that sales volumes could decline as consumers adapt to higher prices at the grocery store.

Analysts will be closely watching for signs of PEDv when other major meat companies such as Tyson Foods Inc (NYS:TSN) and Hormel Foods Corp (NYS:HRL) report earnings later this month.

Archer Daniels Midland Co (NYS:ADM) said this week the disease had not had a significant impact on demand for soybean meal, a widely used feed in hog diets.

Hillshire's fiscal quarter that ended September 28 would be the first to take into account the PEDv disease, discovered in the U.S. hog herd in May and thought to affect hundreds of thousands of the 68 million hog herd. It typically takes hogs about six months to reach slaughter-ready weights.

The incurable disease causes diarrhoea, vomiting and dehydration in hogs, killing as many as 80 percent of piglets that contract it. The disease not does affect humans and is not a food safety concern.

Fewer instances of the disease were seen during the hot summer months, but cases are rising again with the onset of cooler weather, experts said. In North Carolina, which trails only Iowa in the number of hogs it produces, 250 swine farms have tested positive, the state's director of livestock health told Reuters.

Hillshire's chief financial officer, Maria Henry, said in a conference call with analysts that the number of instances of PEDv was increasing, driving up prices for hogs.

"We are heavily affected with what's going on there," she said. "We had a spike early, and then the number of reported cases was coming down. Now the number of reported cases is going back up. That's wreaked a bit of havoc on that piece of the market, particularly around pork and sows."

Benchmark lean hog futures shot to nearly two-year highs at the Chicago Mercantile Exchange after the outbreak.

Prices for live sows are up 27 percent from a year ago, while wholesale prices for hams on Friday hit $89.30 per cwt - just below the record high levels seen in 2008, according to U.S. Agriculture Department data.

Pork prices typically decline early in the autumn as the arrival of mild temperatures and freshly harvested corn and soybeans speed weight gain in the animals, creating more supply.

The worst may be yet to come. Animals contracting the disease in the autumn may not be available in the spring when demand hits its yearly peak before summer grilling season.

"We will see the most significant impact in the spring," said Dan Norcini, an independent livestock trader. "You are going to see a reduction in the number of slaughter-ready hogs in the time frame pork demand begins to increase."

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(Additional reporting by P.J. Huffstutter in Chicago and Lisa Baertlein in Los Angeles; Editing by Peter Cooney)