December 1, 2006

 

Tyson and meat companies delving into commodities to secure prices

 

 

Jean Mrha Beach, Tyson's head of commodity trading and risk management, is trying to get Tyson Foods to think more like energy companies by participating more actively in the commodities markets to protect itself from price swings in raw materials and in final products.

 

At Tyson, raw materials include grains that feed chickens, cows and pigs and the energy needs of farms.

 

In the past four years, Ms. Beach has adapted concepts she learned at a more free-wheeling commodity-trading house Enron Corp to Tyson. Ms. Beach traded natural gas for Enron for six years before the company filed for bankruptcy-court protection in late 2001 amid accounting scandals. She joined Tyson in 2002, shortly after the company bought a large beef and pork supplier, IBP Inc., and expanded its commodities trading.

 

She oversees a 40-person team of traders and market analysts that helps Tyson manage risks across multiple futures markets and procure raw materials.

 

Ms. Beach and her department try to minimise cost swings by making trades aimed at locking in lower prices for commodities.

 

Tyson and every farm is under the mercy of weather swings and geopolitical events that could make the cost of producing its products balloon and its earnings volatile. Credit Suisse Group analyst David Nelson estimated for every 10-cent increase in the price of corn, Tyson's earnings per share drops five cents.

 

At Tyson, Ms Beach said she does trades to lock in lower grain and propane costs to raise chickens.

 

Tyson dedicates about 10 percent of its chicken plant production to large national clients who agree to pay Tyson a fluctuating price based on its changing costs. For some clients, Tyson will trade on their behalf to mitigate their commodity risk.

 

Still, it may not be easy to gain the upper hand when it comes to commodities. A boom in the production of corn-based ethanol has helped push up the price of corn by about 75 percent this year, to a 10-year high yesterday for December delivery of US$3.77 a bushel, from US$2.15 Dec. 30, pulling up animal-feed costs with it.

 

The National Chicken Council said the cost of producing a pound of chicken rises by a penny for every 30-cent rise in a bushel of corn. It costs more to produce a pound of chicken today than at the end of 2005, yet the 20-year average industry profit margin per pound of chicken remains the same. This means poultry producers either would have to raise prices or slash other costs.

 

Energy and weather also eat into profits. In a cold winter, Tyson's propane costs shoot up to heat its chicken houses.

 

Diseases like bird flu and mad cow add to the pressure on the demand side. Citing all these factors, Tyson reported a US$56 million net loss for its fourth quarter ended Sept. 30.

 

Tyson has been actively hedging on its fixed-price contracts, Chief Executive Richard Bond told stock analysts.

 

While its commodities group is still evolving, they are becoming another tool Tyson has available to help manage margins, Ms Beach said.

 

Tyson has credited Ms. Beach's risk-management group with boosting margins in the past. For fiscal 2004, it said the team saved US$127 million through grain-hedging strategies. In the just-ended quarter, the company said the group has absolutely been a net benefit, including in the rising corn markets.

 

Hedging carries risks. For the company's third quarter ended July 1, Tyson cited a US$19 million loss from commodity risk-management activities relating to beef sales and cattle purchases. Still, such losses can be offset on the live cattle procurement side of the business.

 

While large agricultural conglomerates such as Cargill Inc. long have been big commodity-market players, meat processors and packaged-good companies have been less active.

 

Now, a number of companies are waking up to the possibilities thanks to ethanol and the new realities.

 

Today, Tyson is implementing commodities software from a company that typically serves energy companies, SolArc Inc., to track grains, energy and other commodities, so as to protect itself from the whims of the market. 

 

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