April 24, 2008 / 12:44 PM / in 10 years

Rising grain costs push Maple Leaf to loss

WINNIPEG, Manitoba (Reuters) - Maple Leaf Foods Inc MFI.TO, one of Canada’s largest food processors, reported a small first-quarter loss on Thursday because of soaring costs for grain used in its bakeries and hog barns.

Maple Leaf, known for its bacon, wieners and Dempster’s breads, lost C$10,000 ($9,900), or nil a share, compared with a profit of C$10.5 million, or 8 Canadian cents a share, in the year earlier.

“These are stunningly, stunningly challenging and unique times,” Chief Executive Michael McCain told shareholders at the company’s annual meeting on Thursday.

“The world is embroiled with absorbing the implications of the simple truth that food will be considerably more expensive, well into the future,” he said.

Sales in the quarter were C$1.2 billion, down 8.6 percent from a year earlier.

Maple Leaf began to restructure last year as the rising Canadian dollar made its pork exports uncompetitive. It has sold off its feed mills, closed four processing plants, and exited hog barns.

By the end of 2009, it will produce 50 percent fewer hogs and process more than 40 percent less fresh pork, concentrating instead on further-processed meats and meals, McCain said.

McCain said the company plans to launch more than 120 new food products this year.

Meanwhile, grain prices have soared because of demand for food and biofuels and short crop supplies, pushing up costs for its bakeries and remaining hog barns at a time when hog prices are also weak, McCain said.

“All of this translates into more expensive food well into the future,” he said.

Statistics Canada said on Thursday that hog numbers at April 1 were down almost 12 percent from a year earlier -- the biggest year-to-year decline in three decades as farmers bail out of the business because of low prices and high feed costs.

Maple Leaf said it has increased prices but not enough to offset rising costs, and may boost prices again this year.

Wheat prices should decline later this year, and hog prices should increase as farmers decrease herds, McCain said.

As hog prices rise, the company will then need to manage rising costs for its meat processing business, he said.

Higher prices won’t dent North American sales, he said.

“While there’s always the specter that consumers will stop buying ... our experience is that those purchasing patterns don’t actually change in any material way other than on a very temporary basis, measured in months,” McCain said.

When asked during a conference call with analysts how hard it is to pass higher costs on to customers when grocers are trying to keep prices down amid tough competition, McCain acknowledged it was “difficult” but said it has always been hard.

“It really boils down to ... our skills and history and ability to be factual, to communicate prolifically and to execute that price change responsibly in the market place, which is what we try to do,” he said.

Maple Leaf’s stock has been hurt by higher commodity prices combined with market uncertainty about the company’s future earnings after its overhaul, slated to be complete in 2010, said McCain, who urged shareholders to be patient.

During the call, McCain referred to the higher commodity prices as “pass-through economics” and said that the company’s focus will remain on the long-term restructuring process.

“This is an important long-term story of transformation overlaid by a very short-term story of pass-through economics and food inflation,” he said.

Maple Leaf shares finished down 5 percent, or 66 Canadian cents, at C$12.51 on Thursday.

($1=$1.01 Canadian)

Additional reporting by Leah Schnurr

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