Meat + Poultry - July 2010 - 44

BO MANLY

M&P: What do you think are the
most significant financial issues facing
the industry and Smithfield at present? Why these?

reluctant to abandon the flawed cornbased ethanol policy when it has the
direct impact of causing higher food
costs to the American consumer.

RM: Existing ethanol policies have
already driven as much as 30 percent
of the annual corn crop into ethanol
production, directly and substantially
driving up feed costs for livestock and
creating dramatically greater input
price volatility. This jeopardizes the
economic viability of hog producers
across the country. The significant
continuing losses for all hog producers has dramatically decreased their

M&P: Speaking of corn and feedgrain prices, what kind of hedging
strategy is Smithfield using these days?
Has the company had to modify that
strategy in the face of volatile markets?
And what does hedging bring to the
bottom line - not in terms of actual
dollars but in terms of overall stability?

"No futures strategy can
protect Smithfield or the
industry from higher
long-term prices and
volatility caused by
energy/food policies."
equity base and leaving many in a financially strained condition and not
in a position to withstand any further
economic troubles. Also, the industry
incurs additional risk as the percentage
of exports relative to total production
increases. Politically and economically
inspired embargoes by pork-importing
countries have a dramatic impact on
available domestic supplies.
M&P: How should the industry respond to these issues? What are the
best strategies to implement now?
RM: We are encouraged by the EPA's
determination to delay its decision on
the ethanol industry's petition to raise
the allowable ethanol blend in gasoline
by a full 50 percent - from 10 percent
to 15 percent. We hope that the EPA,
after further study and with greater
deference to the science and practical
consequences of increasing the ethanol blend, will abandon any notion of
granting 'E15' in favor of more economically sensible alternatives. Everyone is in favor of developing alternative
energy sources, but we should not be

supply issues the industry has had to
contend with recently?
RM: Let the fundamental markets
work. Depressed hog prices have
forced reduction in the sow herd and,
while the reduction was not as much
as we think it should have been, the
laws of supply and demand will work
if we let them and don't try to artificially influence them. Financial institutions supported marginal producers with staggering losses through the
bottom of this cycle to a greater degree than ever in past cycles. This has
dramatically deepened and extended
losses for the industry.
M&P: Right now, how are what
you've called the "big three" - liquidity, covenants and pensions -
impacting the industry? How are
they impacting Smithfield?
RM: Smithfield's liquidity levels remain strong, in excess of $1 billion.
Our new credit facility contains no
currently applicable maintenance
covenants.

RM: We regularly utilize the futures
markets to hedge our input costs,
which gives us some comfort on a
near-term basis. The fact that the
government could increase the ethanol blending rate from 10 to 15 percent, or something approaching that,
is not good for the input side of the
hog-production business. While we
can get some near-term protection
through hedging, longer-term protection is not as easy. No futures strategy
can protect Smithfield or the industry
from higher long-term prices and volatility caused by energy/food policies.
M&P: Livestock producers have really struggled over the past two years,
although it seems as if 2010 might be
a better year overall than 2008 and
2009. Are there long-term fi nancial
solutions producers and the industry
can implement to prevent the kind of

44 * Meat&Poultry * July 2010 * www.MeatPoultry.com

M&P: You've spoken in the past about
finding synergies among Smithfield's
operating companies to leverage sales
and efficiencies. What synergies did
Smithfield find and how did the company take advantage of them?
RM: As part of the Pork Group restructuring plan, we streamlined our
Pork Group management structure;
consolidated seven independent operating companies into three; closed
six processing plants; merged three
fresh pork sales organizations into
two; consolidated three overseas export teams into one; and consolidated
our manufacturing platform. The restructuring is resulting in overall improved Pork Group base profitability
though reductions in overhead, selling,
general and administrative expenses
(SG&A), and variable manufacturing
costs. Consolidation of sales functions
enables the company to better match


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Contents
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Meat + Poultry - July 2010 - Contents
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