File photo of a Maple leaf Foods plant in Toronto.Fred Lum/The Globe and Mail
Canada's Maple Leaf Foods Inc. reported a higher quarterly profit on Wednesday, sending its shares up 3 per cent, but it warned that the severe U.S. drought would probably drive up food prices.
Chief Executive Officer Michael McCain said the hot, dry conditions in the U.S. Midwest, which have scorched corn and soybean crops and driven up prices of wheat and other grains, posed a major challenge for food companies.
"We are heading into challenging commodity markets, driven by drought conditions throughout North America that will fuel further food inflation," he said.
Shares of the company, which is one of Canada's biggest pork and poultry processors and bakers, rose 30 cents to $10.30 in early trading in Toronto, after second-quarter earnings beat expectations.
But Maple Leaf shares have plunged by more than one-fifth since late April, touching a nearly two-year low earlier this week as the drought grew more severe since farmers planted crops and grain prices spiked.
Wheat is a key cost in the baked goods Maple Leaf produces, and grain prices are also an important factor in the cost of raising pigs.
Shares of U.S. meat-processing rivals Smithfield Foods Inc , Tyson Foods Inc and Hormel Foods Corp have slumped since spring, while Canadian food company George Weston Ltd's stock has also dropped.
Maple Leaf's second-quarter net earnings rose to $32.5-million, or 21 cents per share, from $24.6-million, or 17 cents, a year earlier, as the company reaped the benefits of price increases for some products and an ongoing effort to modernize its meat operations.
Maple Leaf is in the midst of a $560-million plan to upgrade its meat operations, shutting down old packing plants and making others more efficient to better compete with its U.S. rivals.
Excluding items, earnings per share fell to 28 cents from 30 cents. Analysts on average had expected 23 cents a share, according to Thomson Reuters I/B/E/S.
Revenue rose about 2 per cent to $1.26-billion, in line with analysts' estimates.
Maple Leaf's bakery unit, Canada Bread Co Ltd, reported net earnings of $26.8-million on Wednesday, up 80 per cent from the weak year-earlier quarter, because of larger sales volumes and price increases.