Smithfield Foods (NYSE: SFD) shares are falling after the company reported adjusted fourth-quarter profit of $2.4 million, or 1 cent per share, below analysts' expectations of 7 cents per share. Losses in the hog unit, blamed on high feed costs contributed to the big drop in earnings. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on SFD.

After hitting a one-year high of $35.79 in July, the stock hit a one-year low of $23.75 in January. This morning, SFD opened at $29.10. So far today the stock has hit a low of $28.22 and a high of $29.35. As of 12:15, SFD is trading at $28.76, down 1.37 (-4.5%). The chart for SFD looks bullish and steady before today's drop, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $35 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in four and a half months as long as SFD is below $35 at October expiration. Smithfield would have to rise by more than 23% before we would start to lose money. Learn more about this type of trade here.

SFD hasn't been above $35 for more than a few days in the past year and has shown resistance around $32 recently. This trade could be risky if the cost of feed grains relax in the coming months, but even if that happens, this position could be protected by resistance SFD might have around $32, where it topped out last month.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in SFD.

Reuters reports that workers at Quality Pork Processors Inc in Austin, MN have contracted a new disease -- symptoms include inflammation of the spinal cord, mild weakness, fatigue, numbness and tingling in the arms and legs. The source of these symptoms appears to be these workers' use of compressed air to blow pork brains out of the skull cavity.

Why is this happening? A doctor has been studying 18 Minnesota patients, all of whom have evidence of nerve involvement, typically affecting the legs. He said tests showed patients had damage to the nerves at the root level near the spinal cord, and at the far reaches of their motor nerves, where the nerves connect with muscle.

Why should investors care about this? It's worth looking at whether any publicly traded pork processors use the same technique that Quality Pork Processors does for blowing out pork brains. One candidate for further study is Smithfield Foods (NYSE: SFD), a global pork processor. So far the pork workers have not sued their employer for the disease. But if the problem becomes more severe and widespread, it could affect pork processor profits.

And that would cause nerve problems for investors as well as workers.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Smithfield Foods (NYSE: SFD) is the largest hog producer and pork processor in the world, offering fresh pork, smoked and boiled ham, bacon, sausage, hot dogs and ready-to-eat foods. Products are sold under such brand names as Smithfield, John Morrell, Cumberland Gap, Patrick Cudahy, Cook's Ham and Armour-Eckrich Meats. Smithfield is also the fifth-largest beef processor in the United States. Hormel Foods (NYSE: HRL) and Tyson Foods (NYSE: TSN) are major competitors.

The company surprised the Street late last month when it reported fiscal Q2 EPS of 24 cents and revenues of $3.46 billion. Analysts had been looking for 21 cents and $3.28 billion. Management noted that packaged meat profit margins more than doubled and earnings from international meat processing rose sharply. The SFD price popped on the news and then moved into a bullish "flag" consolidation pattern. Stocks frequently exit flags moving in the same direction they were traveling on entry. In this case, that would be to the upside.

While stocks boomed yesterday on the Fed's 50 basis point rate cut, Smithfield Foods Inc's (NYSE: SFD) stock dropped as analysts wrote that improved pork production in China could lead to excess production being sent to the U.S. market.

Due to this increase in supply, pork prices have declined more than 11% recently, according to a China news report. The recovery of pork production could be a sign that the swine flu, which set the industry back for years, is finally under control in this part of the world.

In August, Smithfield announced it would sell 60 million pounds of pork to China, but it appears the Chinese do not need it all. It looks like we have an ugly supply and demand imbalance building in the pig business.

Back on Tuesday, JP Morgan recommended investors buy shares of Virginia-based Smithfield Foods, Inc. (NYSE: SFD) into their earnings report, with expectations of a strong quarter. Early this morning, the Virginia-based hog, pork and beef producer blew away third-quarter earnings, reporting Q1 earnings per share (EPS) of 47 cents, well over the consensus of 42 cents.

To help achieve this monumental quarter, Smithfield continued its focus on higher margin and fully processed products, a strategy that had produced better margins in their pork segment a year ago. "Generally, the second and third quarters are the best for the pork segment as demand generally improves as we enter the Fall holiday period," CEO C. Larry Pope said in a statement today. Pope expects the live hog market to remain strong for the next six-to-twelve months. Excluding the problems in Romania, Pope said he was "reasonably optimistic about the remainder of fiscal 2008."

With a solid first quarter behind them, does this mean the best is yet to come for Smithfield? Despite the market facing some pressure today, Smithfield Foods is up $2.40, to $32.47.

I was captivated when I read in yesterday's Wall Street Journal [subscription] that the Chinese government, in response to a growing pork shortage brought about by the country's growing prosperity, was considering tapping into its STRATEGIC PORK RESERVE. Really. Apparently, it has stockpiled frozen pork as well as pigs on the hoof against the day meat prices skyrocket.

After I quit giggling over the image, I began to wonder if our government was doing enough to protect us from similar shortfalls. I know, of course, about our huge strategic petroleum reserve, sufficient to fuel every SUV in the country for a dozen trips to Wal-Mart (NYSE: WMT). But petroleum isn't our only essential resource. Do we have a strategic beer reserve? A strategic disposable diaper reserve? And how about our supply of Starbucks (NASDAQ: SBUX) coffee? Can you imagine the riots if our supply of French roast is cut off for even a day? Don't threaten my freakin' coffee!

Of course, we aren't alone in the world in our dependence on life's essentials. One would think that Norway would have a substantial Strategic Herring Reserve. And where would Italy be without a Strategic Olive Oil and Garlic Supply? I'd guess Monaco has thousands of extra cases of Taittinger put aside, while the Saudis stockpile extra wives. Closer to home, you'd think Canada would stockpile pucks, Mexico tortillas.

If you want to take a flyer that the Chinese pork shortage might force them to shop internationally, you might look at leading U.S. pork producer Smithfield Foods (NYSE: SFD), which is taking over another large producer, Premium Standard.

I have no recommendations for plays in a puck shortage.