Smithfield Foods (NYSE:SFD) is the world's largest hog producer and slaughterhouse, also known as a pork processor. Approximately half of Smithfield's profits come from processed meats sold under one of Smithfield Foods' private brand names, a percentage that the firm hopes to increase in the future. These products are sold at higher margins, even in times of rising commodity prices - whereas fresh meat is sold to butchers, who then mark up the product to earn a profit. Processing the meat itself allows the company to earn maximum profit from each sale and to pass a higher percentage of input costs onto consumers. The company earned $11.2 billion in revenue but incurred a net loss of $101 million in 2010.
By vertically integrating its hog production and processed pork segments, Smithfield is insulated from the hog commodity market. It is not, however, insulated from feedstuff commodity prices, like grain, since 60-65% of the cost of raising hogs is feedstock prices. Corn makes up 85% of a pig's diet, and demand for corn, spurred by ethanol production as well as an expanding global population, has led corn prices to rise nearly 60% since 2007. Increased commodities prices depress margins as Smithfield Foods is unable to completely pass on feed prices to consumers.
Smithfield Foods operates in four segments: pork (its largest segment), international, hog production, and other (turkey production):
The pork segment consists of fresh pork and packaged meat. Smithfield is shifting strategy towards its packaged meat business, due to the higher margins of private labels. Meat is sold under Smithfield, Farmland, John Morrell, Gwaltney, Great, Cumberland Gap, Armour, Eckrich, Margherita, LunchMakers, and Dinner Bell, among others. The pork segment procures about 52% of hogs from the hog production segment and the rest from the hog spot market.
The hog production segment consists of raising and selling hogs. It has approximately 900,000 sows producing 14 million market hogs annually, making it the largest producer of hogs in the world. By integrating this segment with the processed pork segment, Smithfield Foods hopes to use economies of scale to decrease the hog cost for each.
The international segment consists of several international meat processing operations. Smithfield has controlling interests in processing plants in Poland, Romania, and the United Kingdom, and smaller interests in plants in Western Europe, Mexico, and China.
The other segment consists of turkey production relating to the 49% stake that Smithfield Foods owns in the Butterball company.
Smithfield Foods is currently the world leader in hog production and has 25% of the market share in United States pork.