Bird flu epidemic takes toll on health of Hormel's Jennie-O

The lethal bird flu sweeping across Minnesota has taken a nasty swipe at one of Hormel Foods Corp.'s top-performing businesses: Jennie-O Turkey Store.

With at least 29 Jennie-O suppliers — including 14 company-owned farms — devastated by the virus, Hormel announced last week that its turkey production would be reduced, pressuring the Austin-based company's profits.

Jennie-O's bird flu challenge came up rather suddenly. The highly pathogenic H5N2 virus surfaced in early March but has grown to epidemic proportions during the past few weeks in Minnesota, the nation's largest turkey producer.

Stock analysts who follow Hormel said they believe the bird flu's effects will be temporary, and animal health authorities believe consistently warmer weather will stop the virus' spread for the spring season. Gov. Mark Dayton — who was set Saturday to meet with U.S. Sen. Al Franken, Rep. Collin Peterson, farmers and emergency responders in Willmar — has declared a state of emergency, as well, strengthening the efforts of state and federal agencies at attacking the virus.

Analysts also said they believe Hormel's diversification will mitigate the impact, the analysts said. The company produces everything from bacon to canned chili and Skippy peanut butter.

Still, the bird flu is a significant uncertainty. While the virus poses no food safety hazards, there's always the chance that consumers will get spooked anyway, analysts say.

"The ultimate impact is still unclear at this point," said Erin Lash, an analyst at Morningstar. Hormel "doesn't know exactly how it will impact supply and their cost structure going forward."

Along with Butterball, Jennie-O Turkey Store is the nation's best known turkey brand. "It's been a great success for Hormel," said Brian Yarbrough, a stock analyst at Edward Jones.

The flu has disrupted the turkey industry's supply chain, and no major poultry company is feeling that more than Hormel, the nation's second largest turkey processor after Butterball.

As of Thursday, 45 of 600 commercial turkey farms in Minnesota had been hit by the bird flu, wiping out over 2.5 million birds, or about 5 percent of the state's annual production. Two stricken Hormel-owned farms alone accounted for 611,000 lost turkeys; overall, the company has lost over 1.3 million birds in Minnesota.

The flu also has led to the destruction of 303,700 turkeys on three farms in western Wisconsin, two in Barron County and one in Chippewa County. All three are Hormel suppliers.

Basically, Jennie-O relies on Minnesota and Wisconsin for its birds. It has five processing plants in Minnesota and one in Wisconsin. Minnesota Pollution Control Agency data show it has about 70 corporate-owned turkey farms in Minnesota.

On Monday, Hormel CEO Jeffrey Ettinger said in a press statement that Jennie-O's supply chain is "experiencing significant challenges." The company declined to make an executive available for this story.

Tight meat supplies and "operational challenges" will pressure the company's earnings in the second half of its current fiscal year, Ettinger said. The company didn't lower its full-year earnings forecast, but noted that profits should fall to the low end of its guidance of $2.50 to $2.60 per share.

Ettinger said the bird flu's financial impact would be partly offset by favorable hog market conditions, which affect its two other core divisions: refrigerated meats and grocery products.

Hormel sells turkey into two main markets. The smaller one is the export trade, which consists mostly of unbranded dark turkey meat, which Americans aren't as fond of. That trade could be hurt as dozens of countries have restricted U.S. turkey imports due to bird flu outbreaks.

Domestically, the business includes deli meat and Jennie-O products. Aside from ground turkey, the Jennie-O brand can be seen on preformed turkey burgers, turkey sausage, turkey hot dogs and turkey bacon. Its most recent product launch is Jennie-O turkey breast sticks, single serving turkey snacks. Such product innovation is "what makes this brand a household name, along with the marketing," Yarbrough said.

U.S. retail ground turkey sales have been trending down recently. By volume, sales dropped 13 percent, 14 percent and 6 percent respectively for the weeks ended April 11, April 4 and March 28, according to market researcher Nielsen.

However, a Nielsen spokeswoman said those declining sales can be traced primarily to two retailers, and that with Easter falling on April 5 this year, some of the drop-off could stem from consumers moving their spending into ham and other meats before the holiday. In other words, it's too early to chalk up a bird flu effect.

Health experts say the bird flu poses a low risk for humans, and there hasn't been a case associated with the current outbreak. The sick birds and others in proximity to them are destroyed, and all turkeys headed to slaughter are tested for flu.

"I think that since none of [the sick birds] entered the supply chain — and how Hormel has been adamant about that — that will help," said Yarbrough, the stock analyst. Still, "there is a possibility it could impact demand. There's always that risk."

Lash agreed: "It always gets down to consumers' perceptions of quality and safety."