Although the sharp increases in agricultural costs earlier this year have been partially reversed, there will still be pressure on the margins of food-processing companies. However, not all food processors face big increases in farm input costs — and others are benefiting from efficiency gains or new acquisitions.

Montreal-based Saputo Inc. processes milk, which is a supply-managed product in Canada with its price set according to a formula. Saputo also has recently bought a U.S.-based specialty-cheese firm.

Toronto-based George Weston Ltd. s Weston Foods subsidiary (primarily baked goods) is facing higher wheat prices, but the combination of a 5% retail price increase and efficiency gains should keep earnings up.

Maple Leaf Foods Inc. , also based in Toronto, processes meat, including chicken, turkey, ham and deli products; the company also makes breads, other baked goods and pasta. Both chicken and turkey are supply-managed products.

Bill Chisholm, analyst with Montreal-based MacDougall MacDougall & MacTier Inc. in Toronto, says food processors buy their agricultural inputs using six- to nine-month forward contracts, providing time to adjust to price increases. In very general terms, he adds, agricultural inputs, energy and labour each account for about one-third of food processors’ costs before marketing costs.

Here’s a closer look at these three companies. The most recent year’s revenue and net income are based on international financial reporting standards, while the year-earlier numbers are based on Canadian generally accepted accounting principles.

> George Weston Ltd. Most of the movement in this company’s stock is determined by 63%-owned Loblaw Cos. Ltd., also of Toronto, which accounts for about 85% of Weston’s total operating income. But, says Chisholm, Weston Foods, the processing arm, can be important at the margin.

Weston Foods has only one major competitor in Canada — Canada Bread, owned by Maple Leaf — but Weston Foods also sells in the U.S. market. Weston Foods’ revenue was about $1.6 billion in the year ended March 31, with $1 billion of that in Canada. Chisholm says Weston Foods is very well managed and has consistently improved profitability during the past 10 years.

Although Chisholm says higher commodities prices “will pressure margins this year,” he thinks this situation will be more than offset by the 5% retail price increase Weston Foods implemented starting April 1, combined with continuing cost-reduction programs and the contribution from Keystone Bakery Holdings LLC in the U.S. and ACE Bakery in Canada, which it purchased last autumn.

Chisholm has a “buy” recommendation on Weston’s stock, with a 12-month price target of $80; the 129.1 million outstanding shares were trading at $70.58 on June 9.

Net income was $520 million on revenue of $31.8 billion for the 12 months ended March 26, vs net income of $214 million on revenue of $32 billion a year earlier.@page_break@> Maple Leaf Foods Inc. has had its problems, including recalls on products and shareholder pressure. The most serious recall was in 2008, on products linked to the illnesses and deaths of some consumers; that situation resulted in a class-action lawsuit that Maple Leaf settled for $27 million.

In 2010, Maple Leaf, which is 31%-owned by the McCain family, lost a major shareholder — the Toronto-based Ontario Teachers’ Pension Plan Board, which sold its 36.3% interest as result of its objection to Maple Leaf’s shareholder rights plan.

Last December, Toronto-based West Face Capital Inc., which owns 11% of Maple Leaf’s shares, requested a special shareholders’ meeting, but withdrew the request in February after the appointment of West Face chairman Gregory Boland and an independent director to Maple Leaf’s board.

A report from Toronto-based TD Newcrest, a division of TD Securities Inc. , says, “The addition of another intelligent and experienced voice [Boland], particularly one with a reputation for forcing change if and when needed, [is good for shareholders].”

The TD Newcrest report says Maple Leaf is making “solid progress” but the market won’t give the stock a higher valuation that would justify a “buy” recommendation until Maple Leaf’s meat and bakery divisions both generate sustainable targeted margins. (In the first quarter of this year, margins increased for meat but not for bakery.) TD Newcrest currently has a “hold” recommendation on Maple Leaf stock, with a 12-month target price of $13.50; the 137.1 million outstanding shares closed at $11.41 on June 9.

Net income was $27.6 million on revenue of $4.9 billion for the year ended March 31 vs net income of $58 million and revenue of $5.1 billion a year earlier.

> Saputo Inc. is the largest dairy processor in Canada, third-largest in Argentina and fifth-largest in the U.S. The firm is expanding, having acquired Fairmount Cheese Holdings Inc. — the parent of DCI Cheese Co. Inc., one of the largest specialty-cheese marketers in the U.S. — in March.

A recent TD Newcrest report speculates Saputo may eventually bring some of DCI’s production in-house; that Saputo could “leverage this distribution capability to get some of its existing products into deli counters”; and that this could make it “more feasible for Saputo to roll up smaller specialty-cheese players.”

TD Newcrest analysts changed their “buy” to a “hold” in the report, which says that Saputo’s stock price is expected to be “range-bound for a little while” after its steep climb since Feb-ruary 2009 — unless there is another acquisition.

Analysts with Royal Bank of Canada’s capital markets division in Toronto, who note that the shares are trading at a premium, also have a “hold,” rating the stock as “sector perform.”

Both RBC’s and TD Newcrest analysts’ 12-month target price is $49. The 207.9 million outstanding shares closed at $46.09 on June 9.

Saputo’s net income was $451 million on revenue of $6 billion for the year ended March 31, vs net income of $383 million on revenue of $5.8 billion the year before. IE