Costly grain forces Hormel to lift prices

The company noted at the Wachovia Securities CEO Summit that its Jennie-O Turkey Store division saw its operating profits drop by nearly half to about $14 million in its second quarter despite a rise in sales.

Chief financial officer Jody H. Feragen said the division raised prices by about 2% in that quarter, but a 4-5% price increase was really needed to cover the increasing cost of corn. She said “competitive pressures” made it difficult to institute a higher price increase then.

Corn prices have skyrocketed to near $4 per bushel due to the rising demand for the alternative use for fuel ethanol.

Feragen said every 10 cent increase in the cost of corn equals about $3.5 million more in costs for the subsidiary.

“We really need to see 4-5% increase in price to recover all the costs related to corn,” she said. “We expect them to continue to see price increases in the third quarter and in the fourth quarter.”

At the conference, Feragen also said the company may look for investments to grow its business, including acquiring businesses and making internal investments.

“We are very conservatively leveraged, so I think there is ample opportunity to add debt to our portfolio either through acquisitions or other investments,” she said. “We do see a sweet spot in the $50-150 million deals.”