January 28, 2008

 

Grain prices and beef throws profitability into question for Tyson Foods

 

 

Industry analysts are predicting a tough year for Tyson Foods, one of the few top meat producers in the US, just one year after it returned to profits after four consecutive quarters of losses.

 

The sense of foreboding was heightened when just days before it was due to announce its first results Monday ( January 28, 2008), the company announced it is converting a beef slaughter plant into a cold storage warehouse and cutting 1,500 jobs in the process.

 

Chief Executive Dick Bond explained the move by saying there was a need to cut excess capacity. 

 

The company is expected to lose big on beef, with production of 12,000 heads of cattle in excess per day.

As the largest beef processor in the US, Tyson Foods slaughters about 32,500 head of cattle per day. With an estimated loss of US$37 per head, this would work out to be a US$1.2 million loss per day.

US analysts are now divided over how much the company made over the last quarter, with estimates ranging from US$4 million to US$52 million.  

 

In the year-ago period, the company earned US$57 million.

 

However, current conditions in the market, especially with beef and poultry, may make it difficult for the company to repeat the feat.

J.P. Morgan analyst Pablo Zuanic predicts Tyson Foods will earn no cents per share for the quarter, lowering his estimate from 3 cents last week, noting that the poultry industry faces perilous times as grain prices soared and overproduction of chickens loomed.

 

The company is also hinting that it is starting to feel the pain from high feed prices. In 2007, the company reported its grain exposure was US$4 million per week more than expected. Soymeal prices were 56 percent higher in the first quarter compared to a year ago.

 

Corn and soy futures, on which the company uses to hedge its grain buying, have increased roughly 20 percent since November. This would have eaten into chicken margins, Farha Aslam, analyst with Stephens Inc said.

 

Aslam predicts earnings will be affected by poor performances in the chicken and beef segments, despite record results in the company's pork segment.

 

Tyson may earn 1 cent per share in the quarter ending Dec. 30, compared to the 16 cents it earned in the previous year's period, Aslam said.

 

Most chicken processors have seen margins decrease since August, despite better than average pricing and improved international chicken sales.

 

Whether the industry could continue using higher chicken prices to offset higher grain costs will depend on whether it reduces production, Aslam said.

 

Top companies cut production 5 percent in 2006 and lost market share to smaller companies as a result.

 

A repeat of the situation looks unlikely as Tyson Foods and Sanderson Farms have already said they will ramp up production this year.

 

Aslam said the industry's price recovery would depend on whether Pilgrim's Pride, another top producer, would announce production cuts in its upcoming earnings call on Tuesday.

 

However, some analysts believe the lag in feed and pricing realization should enable Tyson Foods to deliver a relatively solid margin in chicken and that higher grain costs in recent weeks would not affect Tyson Foods' earnings for at least another quarter.