Fear and Loathing in the Market

While most of America was preparing for a day of thanks, followed by a day of shopping, Pilgrim's Pride was talking to lenders to save themselves from bankruptcy. You might recall our post two weeks ago chronicling the saga of Pilgrim's Pride, who's temporarily extended (for the second time) line of credit was due to expire on Wednesday. It would appear that they had something to be thankful for, because on Friday they made this announcement via their website:

Pilgrim's Pride Corporation (NYSE: PPC) today announced that it has reached an agreement with its lenders to extend the temporary waiver under its credit facilities through noon (CT) on December 1, 2008. Pilgrim's Pride continues to pursue opportunities to refinance and recapitalize its business, and to position itself to capitalize on its strategic advantages.

While a weekend doesn't seem like a lot of time, it was enough to make them postpone their expected fourth quarter loss of $802 million dollars. Business Week has more:

The company said Friday in a regulatory filing it was delaying filing its annual report for fiscal 2008 with the Securities and Exchange Commission due to ongoing talks with its lenders regarding temporary waivers and "related financial uncertainties."

According to the Washington Post, shares of the company spiked 101.9% with the announcement of the waiver. What their company will do Monday after the deadline passes and the actual fourth quarter earnings are posted remains to be seen.

While some people are waiting to see the dip in gas and corn prices translate into lower prices at the grocery store, at the supply end a fear is mounting that deflation is impacting the markets. In cattle news, the Dickinson Press has an article about the falling prices of cattle amid industry fear:

Wade Moser, executive vice-president of the North Dakota Stockmen’s Association, said the cattle market is being driven by panic just like the stock market.

“There is absolutely no reason fundamentally-wise we ought to see this market go the way it is,” he said. “We are seeing corn prices lower than a year ago. We’re seeing diesel and fuel prices come down to good levels.”

It’s just that this whole market is being driven by fear, that’s the only reason we’re seeing what we’re seeing.”

Producers statewide aren’t selling their cattle, except where producers were forced to because of the drought, Moser said.

Has deflation affected your business? How were your Black Friday sales? Are you using incentives like the restaurants profiled in this CNN article? Let us know in the comments below!

Further Reading:

The Star Tribune is doing a series on the food chain to research the connection between high prices and fuel.

The Daily Tribune on Pilgrim's Pride and their credit extension

The Cattle Network on ethanol mandates and tax incentives

Hudson Hub Times on what farmers are saying about ethanol and food prices

Let's Talk Turkey

Because you haven't heard enough about food price inflation, the Wisconsin Farm Bureau Federation chimed in with their annual report about the average price of a Thanksgiving dinner.

And you guessed it; prices went up.

The price tag on a meal for a family of eight will cost $42.37 this year. The 2007 cost was $39.66 for 14 items. The grocery cart was comprised of: 16-pound self-basting turkey; 14-ounce package of herb-seasoned, cubed stuffing; 30-ounce can of pumpkin pie mix; a package of two, nine-inch, frozen pie shells, a three-pound bag of sweet potatoes; a five-pound bag of potatoes; 12-ounce package of brown-and-serve rolls; one-pound package of frozen peas; a half-pound each of fresh carrots, celery, and onions; 12-ounce package of fresh cranberries; one gallon of whole milk; and a one-half pint of whipping cream.

The Capital Times has more:

Potatoes had the biggest price jump from last year, up 32 percent from $2.19 a 5-pound bag in 2007 to $2.90 this year.

The Farm Bureau said fewer acres of potatoes were planted this year and poor weather early in the year contributed to a smaller crop and the resulting higher prices.

Dairy prices and global demand shot up in 2007 but subsided in 2008, so the cost of a gallon of milk in this market basket survey was up only four cents to $3.39 a gallon from the 2007 survey. Last year, the price of milk was 66 cents higher than the year before.

Sweet potatoes were down 15 cents for a 3-pound bag, dropping to $1.11 a bag from $1.26 in 2007.

The study, which has been going for 17 years, also found that the price had risen 60% since it's inception. The original price of the meal in 1991? $26.50.

Don't let all of this talk of higher prices ruin your Holiday feast. The Ventura County Star reminds us that a meal for eight totaling around $45.00 is still cheaper than calling for take-out:

The total tab is cheaper than most people might spend taking a group out for a pizza dinner, said Jim Sartwelle, a federation livestock economist.

"It kind of highlights how you can stretch your food dollar by picking bulk, nonprocessed food items," he said. "Thanksgiving is that one day of the year that most of us feel like we don't really mind being in the kitchen."

If one wanted to sidestep the grocery stores and get their own bird, the Oregon Department of Fish and Wildlife announced on Friday that they still have lots of turkey tags available. An Oregon resident can expect to pay $18.00 for their turkey hunting tag. You can read more about wild turkey hunting at KPIC.com, or via this brochure (PDF file) from the ODFW.

Don't want turkey at all? Dining@Large has a top ten list of turkey alternatives. Here are the top five:

* Wild duck with sauerkraut

* Goose with fruit stuffing. Unfortunately the one time I cooked a wild goose (a hunter friend had brought it to my in-laws), it also contained buckshot.

* Native American foods like beans, squash and corn for vegetarians and vegans

* Turducken (partially boned turkey stuffed with boned chicken stuffed with boned duck)

* Small roast chicken with cornbread-pecan stuffing for a couple or people eating alone

If you do decide to cook a turkey, make sure you have the Butterball Turkey Hotline number ready (1-800-Butterball). Lots of people laugh at the idea of needing to call for help, but Snopes.com reports that "incidents" do happen:

One of the more unusual questions handled by Butterball's Turkey Talk-Line (which the company has operated since 1981) comes from those who have mistaken a well-traveled joke for an actual recipe: They call to ask if they can pop popcorn in the turkey's cavity during the roasting process. (The joke's punch line is: "You know the turkey is done when the popcorn pops and blows the rear off the bird.") And no, you can't.

For the official word on how to cook a turkey, look to the USDA. They have an extensive guide on how not to sicken your dinner guests.

And finally, Simply Recipes will tell you exactly what to do with all of those leftovers!

Pacific Food Distributors wishes everyone a
happy, delicious Thanksgiving Holiday!

When Chicken Goes Bad

It has been a tough time for giants in the poultry industry- and to recap, no company was feeling the pain at the end of October more than Pilgrim's Pride. Despite securing another temporary line of credit to hold off the bill collectors for another month, CreditSights, an independent research firm, released a report stating that as soon as a $25.7 million interest payment due bill comes due after a 30 day grace period, bankruptcy is "highly probable." Business Week has more:

When that grace period runs out, "a bankruptcy scenario now seems highly probable," according to research firm CreditSights. The firm said in a note Wednesday that though the company was able to secure a second temporary waiver, it does little good.

"Although the temporary waiver provides Pilgrim's Pride with another 30 days of life, it appears to be more illusionary than substantive," the report said.

Pilgrim's Pride spokesman Ray Atkinson said the company continues "to believe Chapter 11 is not in anyone's best interest."

As one could imagine, that report did little to help the company's sagging stock prices. On Sept. 25, Pilgrim's Pride stocks had already plunged 40 percent after the company said it may breach a loan covenant because of a significant loss in the quarter that ended Sept. 27. Current prices are at $.25 a share.

It is worth mentioning the Pilgrim's Pride saga, because MarketWatch is now reporting that Tyson's poultry division is set to follow in their footsteps:

So far, Springdale, Ark.-based Tyson won't cut poultry output to put the unit on firmer ground. The business lost $91 million for the quarter ended Sept. 27.

Analysts, however, are alarmed these factors could put Tyson in danger of violating its debt-covenant credit agreement, just as Pilgrim's Pride did last month. Still, Chief Executive Richard Bond sounded confident his company could renegotiate its loan terms.

"No amendments are guaranteed in today's jittery credit market, no matter how strong management's relationship are with lenders," wrote J.P. Morgan analyst Ken Goldman, who issued a sell rating on Tyson shares Tuesday and chopped his price target to $4.

Even Moody's Investor Service downgraded Tyson's rating last Thursday, according to The International Herald Tribune.

So, why isn't Tyson cutting output to stabilize losses? Blogger Tom Philpott at Grist speculates:

Normally under such conditions, giants like Tyson merely cut production: produce less chicken, and thus boost its market price. And here's the weird part: Tyson actually boosted chicken production in the latest quarter by 6 percent, thus worsening the problem.

And the company has vowed not to cut chicken production going forward. Why? Barclays Capital analyst Christopher Bledsoe thinks he has an answer: Tyson is intentionally taking losses in its chicken segment to "force other chicken processors to carry a disproportionate burden of this cycle's necessary production cuts."

Translated, I think he means to say that Tyson is trying to drive its largest poultry competitor, number-one chicken producer Pilgrim's Pride, out of business. You see, while Tyson can, at least partially, offset losses in its poultry business with pork and beef profits, Pilgrim's Pride is a pure chicken company.

Thus it is extremely vulnerable to ongoing trouble in the chicken market -- and that is exactly what Tyson is creating with its policy of maintaining heightened levels of production.

If Pilgrim's Pride collapses into bankruptcy, its assets will be available for fire-sale prices -- and a company like Tyson could be poised to snap them up. At any rate, the fall of its largest competitor will give Tyson more leverage to dictate prices to both farmers and consumers.

While Pilgrim's Pride picked a "restructuring executive" last week, it remains to be seen if the company can turn itself around. Some investors are already counting out both of the giants and looking to other brands. Alan Brochstein of SeekingAlpha.com is endorsing Hormel Foods:

In an environment of falling sales, plunging earnings and slashed or eliminated dividends, I think that HRL will stand out as an oasis of stability that offers potentially that which will be quite scarce: growth. For those of you concerned about the economic crisis leading to global chaos and the destruction of civilization as we know it (I ran into a bunch of these folks when I dissed gold recently in an article that not only reinforced the idea of the outsider's perspective perhaps having value but was also one of the most read and commented upon blogs I have posted), maybe the company benefits from the hoarding of canned goods. Kidding aside, I recommend that everyone set aside their fears of and negative associations with Spam and consider Hormel.

Meanwhile the Financial Times reports that Sanderson Farms is hoping to buy up some Pilgrim's Pride Assets that they are quietly trying to sell:

Pilgrim’s started the sales process earlier this year by putting its Mexican division on the block, but assets up for grabs now include North Carolina and Arkansas plants, the same sources said. Sanderson Farms is rumored to be a particularly interested bidder, said one of the bond holders and the buysider.

Who do you think will still be standing this time next year? Will Thanksgiving Sales hurt or help any of the poultry giants? Let us know in the comment section below!

Further Reading:

MarketWatch on Tyson not cutting chicken output.

The Dallas News on Pilgrim's Pride picking the restructuring executive.

Boston.com on the feared dry spell for the turkey industry.

Food Prices: Increases on the Way

On Thursday the National Chicken Council, in collaboration with Farm Econ, announced in a teleconference that food inflation could be 7 to 8% in 2009. From Reuters:

"We've been losing money for more than a year," said Bill Roenigk, economist for the Chicken Council, who said producers intend to cut production by as much as 12 percent. "We need to recover these feed costs."

Thomas Elam, head of Farm Econ, said poultry, hog and cattle producers would cut production in coming months because of feed costs, meaning less meat on the retail market but at higher prices.

Menu prices are restaurants up 4.3 percent so far this year, the largest increase since 1990, said Hudson Riehle of the National Restaurant Association. He said one-third of each sales dollar goes to food purchases.

Who are these high food prices benefiting, if anyone? All Monday long Wall Street waited on edge, as preliminary news from Tyson spoke to a fourth quarter loss. When final profits were posted, however, a much different picture emerged as the industry giant reported a 50% rise in profits. Most of the gains were in the beef and pork sectors, as the poultry division suffered on the rise of grain costs. Representatives from Tyson said that grain costs climbed $230 million in the quarter accounted for a loss of $91 million in its chicken unit.

From the Associated Press:

"Producing the three major proteins has proven to be a strategic advantage," said President and Chief Executive Richard L. Bond. "The strong performance by our beef and pork segments supported the chicken segment as it struggled throughout the year due to low prices and high input costs."

The meat industry has been hit by high input costs for key ingredients like corn and oil, as well as an oversupply of meat on the market that's keeping prices down and slumping restaurant demand as consumers eat at home more often. Bond noted that fast-food restaurant sales are holding up, even as people are cutting what they spend when they eat out.

"People are still eating beef but they are eating less expensive cuts," Bond said. "We expect this trend to continue in 2009."

The other big winner was McDonald's, who saw same-store sales rise 8.2%. The key to their success seemed to be value, as consumers passed up sit-down dinners in exchange for Dollar Menu items and new features such as the Southwestern Chicken Biscuits. Forbes has more on the story:

Monday's report provided a new indication that McDonald's low-price formula--such as the recession-friendly Dollar Menu-- is a winning strategy during a difficult economic period. The stock market tells the story: While the Dow Jones industrial average has slid 31.9% over the past year, reflecting the turmoil in the world economy and financial markets that began with the U.S. subprime crisis, McDonald's has shed only 3.4%. That's better than its fast-food rivals like Burger King, down 24.6%, and Yum! Brands, 28.6%, and significantly ahead of casual-dining companies like Ruby Tuesday, which has fallen 88.3%.

What about the rest of the industry? Is any help on the way?

While there is no food industry bailout currently in the works, some companies are getting creative to ease production costs. MarketWatch has a press release from a corporation in Illinois announcing a newer, cheaper packaging for meat and produce:

SCHAUMBURG, Ill., Nov 10, 2008 (BUSINESS WIRE) -- PLIANT Corporation introduces new Revolution(R) meat and produce wrapping films for improved yield and higher performance at lower costs. With recent economic conditions affecting supply prices, packagers can now counter these increases and replace their current packaging with a remarkable new substitute.

Revolution evolved from the combination of PLIANT's unique global PVC production capabilities and 50 years of expertise in the packaging film industry. Drawing on its double-extrusion process and proprietary resin formulating capabilities, PLIANT developed this thinner gauge, high performance film. Utilizing the Revolution product can lower packaging expenses, while maintaining outstanding performance characteristics for both in-store manual wrap stations and high-speed automation.

What do you think about the Tyson profits? Do you think their first quarter posting will be as high? Let us know in the comment section below!

The Candidates on Food Issues

Being as Tuesday is the national election, Pacific Food Distributors brings you a special election break from our normal market news blogging. Today we will look at how each candidate would potentially affect the food industry, as well as a look at who different groups are supporting.

Here are several key food issues and the candidates views on them. These are taken directly from their own campaign websites, JohnMcCain.com and BarackObama.com

On Ethanol and gas prices:

John McCain Believes Alcohol-Based Fuels Hold Great Promise As Both An Alternative To Gasoline And As A Means of Expanding Consumers' Choices. Some choices such as ethanol are on the market right now. The second generation of alcohol-based fuels like cellulosic ethanol, which won't compete with food crops, are showing great potential.

Barack Obama's site does not actually mention ethanol, but here are two of his points on gas prices:

Barack Obama and Joe Biden will close energy industry market loopholes and increase transparency to prevent traders from unfairly lining their pockets, while driving up oil prices at the expense of the American people.

With oil prices doubling in the past year, Barack Obama and Joe Biden believe we have an economic emergency that requires a limited, responsible swap of light oil from the Strategic Petroleum Reserve (SPR) for heavy crude oil to help bring down prices at the pump.

On government intervention and farmers:

John McCain:

Reducing the estate tax rate to 15 percent and permitting a generous $10 million exemption to enable farmers and ranchers to pass along their heritage to the next generation.

• Low individual tax rates
• Access to capital from low tax rates on dividends and capital gains
  


• Limiting the unnecessary intervention of government regulations that severely alter or limit the ability of the family farm to produce efficiently
  


• Improved investment and research incentives to ensure that farmers and ranchers have access to the most modern technology
  


• Bringing the budget to balance, reducing federal borrowing, and controlling spending to reduce the burden on the economy
  


• Providing a responsible safety net for farmers when they're confronted with natural disasters and inadvertent government policies that adversely affect markets and the farmer's ability to produce

Barack Obama:

• Strong Safety Net for Family Farmers: Obama and Biden will fight for farm programs that provide family farmers with stability and predictability. They will implement a $250,000 payment limitation so that we help family farmers — not large corporate agribusiness. They will close the loopholes that allow mega farms to get around the limits by subdividing their operations into multiple paper corporations.
• Prevent Anticompetitive Behavior Against Family Farms: Obama is a strong supporter of a packer ban. When meatpackers own livestock they can manipulate prices and discriminate against independent farmers. Obama and Biden will strengthen anti-monopoly laws and strengthen producer protections to ensure independent farmers have fair access to markets, control over their production decisions, and transparency in prices.

Only Barack Obama mentions the Country of Origin Labeling Law: Obama supports immediate implementation of the Country of Origin Labeling law so that American producers can distinguish their products from imported ones.

Who are people in the food industry supporting?

Newsmeat.com has a breakdown of CEO contributions. Here are some of the top contributors and who they are supporting:

Contributions to John McCain:
John Tyson Tyson Foods chairman, CEO
Steven Reinemund, Pepsico chairman, ceo
David Brandon, Domino's Pizza ceo
Contributors to Barack Obama:
Howard Schultz, CEO of Starbucks
James Sinegal, Costco ceo

Beyond individual campaigns, there are also Political Action Committees where corporations group together and support a common cause. Opensecret.org has a breakdown of agribusiness contributions:

Total Amount:	$17,861,045
Total to Democrats:	$8,442,912	(47%)
Total to Republicans:	$9,412,633	(53%)
Number of PACs making contributions:	260

Agricultural Services/Products: $3,650,326 45% to Dems / 55% to Repubs

Crop Production & Basic Processing: $5,197,119 62% to Dems / 38% to Repubs

Dairy: $1,978,925 46% to Dems / 54% to Repubs

Food Processing & Sales: $2,712,028 35% to Dems / 65% to Repubs

Forestry & Forest Products: $1,342,359 39% to Dems / 61% to Repubs

Livestock: $745,862 48% to Dems / 52% to Repubs

Poultry & Eggs: $518,921 51% to Dems / 49% to Repubs

Tobacco: $1,715,505 35% to Dems / 65% to Repubs

Based on data released by the FEC on October 19, 2008.

You can visit their page and see a further breakdown of where and to who those donations were made.

What food industry issues do you hope the next president will tackle in their administration? Is this election outcome crucial to your long-term business plan? Let us know in the comment section below!