Hormel Foods 2011 Annual Report Download - page 30

28 Hormel Foods Corporation
O
utbreaks of disease among livestock and poultry flocks
c
ould harm the Company’s revenues and operating margins.
T
he Company is subject to risks associated with the outbreak
o
f
disease in pork and bee
f
livestock, and poultry
fl
ocks,
includin
g
Bovine Spon
g
iform Encephalopathy (BSE), pneumo
-
v
irus, Porcine Circovirus 2 (PCV2), Porcine Reproduction
& Respiratory Syndrome (PRRS), Foot-and-Mouth Disease
(
FMD
)
, and Avian Influenza. The outbreak of disease could
adversely affect the
C
om
p
any’s su
pp
ly of raw materials,
increase the cost of production, and reduce operating mar
-
gins. Additionally, the outbreak o
f
disease may hinder the
Com
p
any’s ability to market and sell
p
roducts both domest
i
-
cally and internationally. The Com
p
any has develo
p
ed busi
-
ness continuity plans
f
or various disease scenarios and will
cont
i
nue to update these plans as necessary. There can be no
assurance
g
iven, however, that these plans will be e
ff
ective in
eliminatin
g
the ne
g
ative e
ff
ects o
f
any such diseases on the
C
ompany’s operatin
g
results
.
M
arket demand
f
or the Company’s products may
fl
uctuate
due to competition
f
rom other producers. The
C
om
p
any
f
aces com
p
etition from
p
roducers of alternative meats and
protein sources, including bee
f
, chicken, and
fi
sh. The bases
on which the Com
p
any com
p
etes include
:
•
p
r
i
ce
;
•
p
roduct qual
i
ty;
•
b
rand identi
fi
cation
;
•
b
readth o
f
product line; an
d
•
customer service
.
D
emand for the
C
ompany’s products is also affected by
competitors’ promotional spending and the effectiveness of
the
C
ompany’s advertising and marketing programs. The
Com
p
any may be unable to com
p
ete successfully on any or all
of
th
ese
bases
in th
e
fu
t
u
r
e
.
T
he Company’s operations are subject to the general risks
assoc
i
ated w
i
th ac
q
u
i
s
i
t
i
ons. The Company has made several
acqu
i
s
i
t
i
ons
i
n recent years and re
g
ularly rev
i
ews opportun
i
-
ties
f
or strate
g
ic
g
rowth throu
g
h acquisitions. Potential risks
associated with acquisitions include the inability to inte
g
rate
new operations successfully, the diversion of mana
g
ement’s
attention from other business concerns, the potential loss of
key em
p
loyees and customers of the ac
q
uired com
p
anies, the
p
ossible assum
p
tion of unknown liabilities,
p
otential dis
p
utes
w
ith the sellers, potential impairment charges if purchase
assum
p
t
i
ons are not ach
i
eved or market cond
i
t
i
ons decl
i
ne,
and the inherent risks in entering markets or lines o
f
bus
i
-
ness in which the Com
p
any has limited or no
p
rior ex
p
erience.
A
ny or all of these risks could impact the Company’s financial
results and bus
i
ness reputat
i
on. In add
i
t
i
on, acqu
i
s
i
t
i
ons
outside the United
S
tates may present unique challen
g
es and
increase the
C
ompany’s exposure to the risks associated with
f
orei
g
n operations
.
o
r losses associated with these instruments to be reported in
t
he
C
ompany’s earnin
g
s each period. These instruments may
a
lso limit the
C
ompany’s ability to benefit from market
g
ains
i
f commodity
p
rices become more favorable than those that
have been secured under the Company’s hedging programs.
Additionally, i
f
a high pathogenic disease outbreak developed
i
n the United States, it may negatively impact the national
e
conomy, demand for Com
p
any
p
roducts, and
/
or the
C
ompany’s workforce availability, and the Company’s financial
results could suffer. The
C
ompany has developed contin-
g
ency plans to address in
f
ectious disease scenarios and the
potential impact on its operations, and will continue to update
t
hese plans as necessary. There can be no assurance
g
iven,
however, that these plans will be effective in eliminating the
negative effects of any such diseases on the
C
ompany’s oper
-
a
ting results
.
Fluctuations in commodity prices o
f
pork, poultry, and
feed in
g
redients could harm the Company’s earnin
g
s.
Th
e
C
om
p
any’s results of o
p
erations and financial condition are
l
ar
g
ely dependent upon the cost and supply o
f
pork, poultry,
a
nd
f
eed
g
rains as well as the sellin
g
prices
f
or many o
f
our
products, which are determined by constantly chan
g
in
g
ma
r
-
ket forces of supply and demand.
The live ho
g
industry has evolved to very lar
g
e, vertically
i
ntegrated, year-round operations operating under long-term
supply agreements. This has resulted in fewer hogs being
a
va
i
lable on the cash spot market. Add
i
t
i
onally, overall hog
p
roduction in the U.S. has declined. The decrease in the su
pp
ly
of
hogs could diminish the utilization o
f
harvest and produc
-
t
ion
f
acilities and increase the cost o
f
the raw materials they
produce. Consequently, the Company uses lon
g
-term supply
c
ontracts to ensure a stable supply o
f
raw materials while
minimizin
g
extreme
fl
uctuations in costs over the lon
g
term.
This may result, in the short term, in costs for live ho
g
s that
a
re hi
g
her than the cash spot market dependin
g
on the rela
-
t
ionshi
p
of the cash s
p
ot market to contract
p
rices. Market-
based pricing on certain product lines, and lead time required
t
o implement pricing adjustments, may prevent all or part of
t
hese cost increases from being recovered, and these higher
c
osts could adversely a
ff
ect our short-term
fi
nancial results.
Jennie-O Turkey Store raises turkeys and also contracts with
t
urkey
g
rowers to meet its raw material requirements
f
or
whole b
i
rds and processed turkey products. Add
i
t
i
onally, the
C
ompany owns various ho
g
raisin
g
facilities that supplement
i
ts supply of raw materials. Results in these operations are
a
ffected by the cost and supply of feed
g
rains, which fluctuate
d
ue to climate conditions,
p
roduction forecasts, and su
pp
ly and
d
emand conditions at local, regional, national, and worldwide
l
evels. The Company attempts to manage some of its short-
t
erm ex
p
osure to fluctuations in feed
p
rices by forward buy
-
i
ng, using
f
utures contracts, and pursuing pricing advances.
However, these strateg
i
es may not be adequate to overcome
sustained increases in market
p
rices due to alternate uses
f
or
f
eed
g
rains or other chan
g
es in these market conditions.