August 5, 2008
Pork profits for Tyson may be difficult this year - experts
Robust exports and favourable live hog prices have equalled record profits for the pork segment of Tyson Foods Inc., in recent quarters.
For the past three quarters, the meat giant's pork operating total income is $193 million, up 7.5 percent from the year-ago period. After three quarters of business in fiscal 2008, pork has been Tyson Foods' most lucrative business segment, replenishing losses of $70 million in chicken and $73 million in beef.
Pork comprised 19.6 percent of Tyson Foods' total sales revenue and 100 percent of the company's operating income through the past three quarters.
However, experts say the longer prognosis discloses the company's cash window on pork may be closing as hog farmers ramp up sow liquidations amid escalating losses resulting from higher feed costs.
Average pork margins for processors like Tyson Foods were $13 per head in July, compared to $3.85 per head a year ago, according to Farha Aslam, analyst with Stephens Inc.
At the same time, consumers have seen average pork prices stabilize between $2.85 and $2.90 per pound, a bargain when compared to choice beef retailing for $4.30 per pound, according to Aslam's report.
However, pork has not been profitable to everyone.
According to the National Pork Producers Council (NPPC), swine farmers have lost an average of $30 per hog this year due to higher grain prices, which comprise about 70 percent of the total cost of raising a pig.
Prices for corn and soymeal, key components in hog feed, have risen roughly 75 percent in the past 12- to-18 months, squeezing the profit margins for hog feeder operations and independent hog farmers, experts said.
Charles Maxwell, who manages a swine operation for the University of Arkansas in Savoy, said losses have averaged as much as $40 per head for the state producers. Maxwell, who maintains 150 sows, said the farm sells off between 2,300 and 2,500 finished hogs a year to Cargill. He said transporting the hogs to the slaughter house in Iowa or Illinois costs another $1,900.
Though finished hog prices have increased from $55 to $75 per hundredweight in recent months, the difference between industry feed costs and sales receipts is still showing red ink, which is forcing some liquidation among independent farmers.
Swine producers of all sizes are facing tough economic times and, just like dairy producers, have almost become extinct in the state of Arkansas, said Robert Seay, cooperative extension agent for Benton County.
Experts said outside of Tyson Foods, Cargill, Coastal Plains and Wickman's commercial swine farms, just a handful of other Arkansas hog producers are still operating.
Jerry Masters, executive director of the Arkansas Pork Producers Association said a dozen independent Arkansas swine producers went out of business last year.
Masters said the group were former contract growers for Tyson Foods, which discontinued its contract business in 2002. He said the farmers began selling to a hog feeder north of Arkansas, but that feeder recently pulled back, which forced the Arkansas group out of business.
On the national level, swine herd production is expected to decrease by 10 percent in the next several months, according to the NPPC.
Fewer hogs going to slaughter should provide price support for producers in the next five to six months, if grain costs don't continue to rise, said Gene Martin, senior market analyst with the Arkansas Farm Bureau in Little Rock.
That means consumers will be paying more for pork chops and baby-back ribs come spring, he said.
Martin said speculative investors in recent months bid up grain prices, which cost independent hog producers millions of dollars.
During a recent earnings call Tyson Foods CEO Dick Bond told investors that processors and producers of cattle and pork producers have not been successful at passing along grain costs to the consumer. He said tighter hog supplies due to herd liquidation will likely be felt by early next summer sending both wholesale and retail prices higher.
For now it's the strong export demand to China and Hong Kong that has helped packers maintain favourable margins. Pork production is up about 10 percent year-over-year according to the NPPC. Without those exports, Martin said the industry losses would be far greater.
