February 26, 2010

Global demand to enhance protein profits in 2010

Expected growth in global demand for animal proteins from increased exports and improving restaurant traffic in 2010 signals profitability for Tyson Foods, Smithfield Foods, JBS USA and Pilgrim's Pride.

Fitch Ratings noted the companies' efforts to cut debt in 2009 but "believes gross debt levels for most of these companies remain too high, given their volatile earnings and cash flow." Nonetheless, ample liquidity across the sector should help support their credit profiles and limit the potential downside, the firm said.

"Particular focus should be paid to the protein industry in 2010, given Pilgrim's Pride Corporation's emergence from bankruptcy and continued operating losses for Smithfield Foods hog production segment," Fitch Director Carla Norfleet Tayolor said in a news release.

"Losses in hog production will likely moderate as the year progresses due to reduced industry supply, lower feed costs and greater global pork demand," she said, noting her agency expects a recovery in Smithfield's operating earnings within the next 12 months.

Fitch said production discipline and supply levels will remain a critical factor, and cost pressures will vary across segments of the industry. Tyson, for example, should benefit from lower annual feed costs, but reductions in live hog and cattle supplies could raise procurement prices in pork and beef processing. The firm worries that increased competition in the poultry industry, meanwhile, could destabilise chicken prices.

"Continued poultry earnings improvement for Tyson and a recovery for Pilgrim's Pride will rest upon industry maintaining rational pricing," said Fitch Senior Director Wesley E. Moultry. "The historical quest for market share gains at any cost has been disastrous for poultry prices."