February 7, 2008

US meat processors to feel economic pinch on possible recession

American consumers are surely to shift to cheaper cuts of meat to cope with the economic downturn that is either on its way or products could be in a better position than others.

It could be six to nine months before the squeeze would be felt, according to analysts.

According to Bill Chappell, equity analyst for Suntrust Robinson Humphrey in Atlanta, meat processors would feel the impact in the third or fourth quarter of the year as the food side is the last sector to be hit by a crisis.

Ann Gilpin, equity analyst for Morningstar Inc. in Chicago said larger companies with many contracts would be expected to stave off problems for a while, at least, because their sales cycles and costs are locked in. Small processors would be most vulnerable.

As consumers look to economize, private label suppliers is seen to benefit as the quality of the product is about equal to branded cuts, or when quality isn't a major factor in the decision.

Gilpin said the "power of private labels" or the no-brand will have the upper hand in this situation".

In the near term, however, meat and poultry processors have other, more pressing concerns, with feed grain costs going through the roof, driven by corn-based ethanol demand.

One of the biggest issues facing the meat industry right now is higher commodity costs, said Gilpin. Big increases last year should sent higher prices for processed meat but "that's easier said than done." This year is definitely going to be challenging, she said.
 

Companies supplying Wal-Mart and other large retailers with a lot of leverage would have a harder time boosting those prices than those supplying smaller regional retailers, the analysts noted.