Tyson: Corn Costs Might Force Us To Raise Prices

Gary Mickelson, Tyson company spokesman announced that while the chicken giant has it's corn needs covered for the rest of the year, they cannot promise that prices will stay even in light of the rising cost of corn:

We’re closely monitoring grain prices and continue efforts to limit our exposure to price increases. However, we believe higher corn prices will ultimately result in consumers paying more for chicken, since we’ll be forced to raise our prices to offset the increase in input costs.

And Tyson isn't the only food producer hinting at higher prices. Both General Mills and ConAgra Foods said that the promotions and price battles consumers have been enjoying at the grocery store will begin to ease.

Is this the beginning of another food crisis- despite earlier claims to the contrary?


Further Reading
Bloomberg on Tyson's Announcement
NASDAQ on the dwindling food discounts.

Tyson: Earnings Rise 89%

Despite surging wheat prices, Tyson announced today that its income rose 89% in the recent quarter. The AP has more:

The company has been working through an industry wide downturn brought on by a combination of higher production costs and slumping demand as shoppers cut back on trips out to eat.

The Springdale, Ark.-based company said its prepared foods unit struggled in the quarter because of rising ingredient costs but still made money.

The company reported net income of $248 million or 65 cents per share in the quarter ending July 3, up from $131 million, or 35 cents per share last year.

Revenue rose 11.6 percent to $7.44 billion.

When asked about the current wheat situation, Tyson execs lets reporters in on their proactive solution (via FT.com):

However, Tyson said it had insulated itself by purchasing call options earlier this year, and that the company, which relies on corn and wheat grain to feed its livestock, was confident of this year’s corn crops in the US and Latin America.

Further Reading:

Read the Tyson press release
The New York Times has a in-depth look at Tyson's announcement

Chicken is poised for a comeback.

The chicken industry is finally reporting good news after the recession caused widespread problems. Everything from high feed prices to a decrease in demand led to cutbacks, but now that demand is picking up, feed costs are down, and the stock is still low, the increased price of chicken is helping some industry giants dig out of last year's hole.

Reuters has more on Sanderson Farms, who reported a profit gain, and is also building a new plant in North Carolina:

"Grain prices have come down over recent weeks in reaction to the USDA's January crop estimates, and we believe our feed costs for fiscal 2010 will remain below last year's levels," Sanderson Chief Executive Officer Joe Sanderson said in a statement.

Meanwhile, Tyson (via Business Week) execs expanded on how the decreased supply will lead to larger profits:

Chief Operating Officer Jim Lochner and Chief Financial Officer Dennis Leatherby told investors at a conference that Tyson has improved its chicken business over the past year, as the U.S. supply of meats --chicken, beef, pork and turkey -- has declined.

The smaller supply should help Tyson.

"Most livestock and poultry producers lost money in '08 and '09, which led to cutbacks in the herds and flocks and less protein available in the marketplace," Lochner said in a statement.

The company said that for the first time in 40 years, industry watchers predict a second consecutive yearly drop in the amount of available meats. The reduced supply should mean higher prices for meat, Tyson said.

And the executives said they believe the company is poised to take advantage as demand returns.

While there is concern about the issue with Russia and China's trade situations, it would seem that the worst is over for the chicken industry.

Sanderson Farms Finds the Golden Egg

With lower feed costs and a consumer demand for poultry, Sanderson Farms posted a huge gain for the second quarter. The Wall Street Journal has the story:

Chicken processor Sanderson Farms Inc.'s fiscal second-quarter earnings more than quadrupled, handily beating Wall Street estimates, as feed costs eased back from last year's record.

Meat processors struggled last year as feed costs remained above historical norms. A demand slump from some markets also pressured results, hurting margins and prompting cuts to production and work forces.

Sanderson Chief Executive Joe F. Sanderson Jr. on Thursday said retail demand remained strong and exports improved from the prior quarter, though demand from food-service customers continues to be hurt as restaurants struggle. He added the company is cautiously optimistic heading into summer, when demand typically is better for chicken.

For the quarter ended April 30, Sanderson posted a profit of $26.2 million, or $1.27 a share, up from $6.2 million, or 30 cents a share, a year earlier. Revenue fell 1.6% to $426.8 million.

You can listen to the webcast of their earnings announcement here at the Sanderson website. We will

In other chicken news:

Philly.com has a brief about the sale of the Pilgrim's Pride chicken complex in Louisiana. The sale, totaling over $70 million, was all profit for the company, who is going through a period of restructuring following a December bankruptcy. Pilgrims Pride had paid off its $450 million debt in mid May.

Tyson will be providing 1.7 million pounds of chicken to Illinois food banks as part of a class action settlement. BND.com has more:

The suit, filed in 2001 on behalf of Illinoisans who bought Tyson chicken, claimed the company used a chilling process that added water and therefore weight to chicken.

The company denies wrongdoing and said it settled the suit to avoid further legal costs.

Winners & Losers of 2008

This year was filled with a lot of grim news for the food industry, as oil prices and a recession caused prices to soar and consumers to spend less. Not everyone was hurt by the economy, however some major players will either not be seen again in 2009, or will have to make some drastic changes to survive. Here is part one of a look at who came out on top and who struggled throughout the year. We will have more later this week, so check back!

Winner: Mc Donald's
The Motley Fool reported that MCDonald's profits continued to increase, and people dined less ion sit down restaurants and opted for their value menu instead.

McDonald's has blown past analysts' expectations again and again. This outperformance has been going on for so long it's difficult to remember way back when McDonald's was in dire need of a turnaround.

Loser: Local Restaurants

The papers are filled with the eulogies of favorite eateries. Portlanders will miss chains such as Chili's, but will also lament the closing of restaurants that helped to make Portland a national "foodie" city such as Lucier and D.F. The Oregonian reports:

Observers can't remember a worse year for Portland restaurants. In the first two months of 2008, seven restaurants closed, four as part of the implosion of the overextended N.W. Hayden Enterprises. The year ends with the fall of Lucier -- the $4 million South Waterfront showcase -- ringing in our ears. In between, more than 20 Portland restaurants shut their doors.

Winner: The Country Of Origin Labeling Law

It only took six years and multiple delays, but 2008 finally saw the roll out of the C.O.O.L law, which will allow consumers to know where their meat and produce has traveled to on it's way to the grocery store. While detractors condemned the law for being full of loopholes and a hassle for the industry, threats of fines from the USDA prompted producers, distributors, and retailers to follow suit instead of pushing back the implementation for another few years.

Loser: The Country of Origin Labeling Law

The controversial law, which will do nothing to help food safety and recall issues, was seen by some as a way for the US to sell more product over other countries. The end of 2008 showed us what might be just the beginnings of fall out from other nations; Mexico barred imports from major meat processing plants. Forbes has more:

Meat industry sources said Mexico may be striking back at the U.S. country-of-origin labeling law for fresh beef and pork, which went into effect earlier this year. "That is the only reason that we could see for Mexico doing this," said Allendale analyst Rich Nelson, as one wasn't provided.

Winner: Hormel

Not only did they just win 2008 Food Processor of the Year, Hormel is seeing as an investor's dream in this turbulent climate. The Motley Fool rated it as one of the four stocks that will shine in the market, and even those across the pond are noticing that Americans are eating Spam ahain. The UK Times Online has more:

They have shot up by more than 10 per cent in the past three months and the Hormel Foods Corporation has had to introduce a double shift at its factory in Austin, Minnesota, seven days a week to keep up with demand.

Loser: The Chicken Industry

2008 saw industry gians Pilgrim's Pride file for bankrupcy, after reporting huge losses and a losing battle with meeting creditor deadlines. Their CEO resigned two weeks ago as they struggled to reorganize, and the future of the company is uncertain. Tyson's chicken division suffered losses as well, and on December 17th they signed an agreement with creditors essentially putting up all of their assets for collateral (via Forbes). Let's hope that works out for them.

The Continued Saga of the Chicken Industry

The country is still buzzing from the Pilgrim's Pride bankruptcy announcement, but that isn't the only news circulating in the chicken industry. Sanderson Farms, the fourth largest producer in the country posted a loss of $51.9 million, or $2.56 per share, for the fourth quarter.

While Sanderson stocks were expected to plummet, Joe Sanderson, Sanderson Farms CEO made a statement via conference call to investors assuring them that his top priority was protecting the company's balance sheet and not seeking to buy up assets. This announcement helped the company's shares rise $4.65, to $30.27 per share. You can listen to the conference call here at the Sanderson Farms website, or read a detailed stock analysis at Forbes.

What is Sanderson blaming the loss on besides feed costs? Football fans. Yes, really. Reuters has more on the story:

"Normally wing prices firm after Labor Day as football starts and fans begin moving into bars and water holes to eat Buffalo wings and watch their favorite teams. That did not happen this fall," Joe Sanderson, chief executive of No. 4 chicken producer Sanderson Farms Inc, said Thursday during a conference call with analysts.

He points out that even while wing prices have dropped nearly 25% since last year, the recession is causing fans to stay home. Until demand increases or production decreases, wings will continue to be a money loser. In an attempt to jump start the latter, Sanderson announced that they would cut production by 10%.

The hard times in the chicken industry, while not as prominently displayed as the auto industry, are starting to have a pronounced effect on working Americans. The recession is causing people loose jobs and not be able to eat out or buy as much at the grocery store, and in turn major plants are cutting back or ceasing production altogether. Sanderson announced that they would not give out their annual bonuses for 2008, while a plant which did chicken de-boning for Tyson was forced to close after the poultry giant chose not to renew their contract. The town of Pittsburgh Texas is waiting to see what will become of Pilgrim's Pride- the company employs about 5,000 people at its headquarters. The Associated Press has more on the story:

"It would look like a ghost town," said Strawn, who says Pilgrim stops by the restaurant many weekends. "There ain't nothing else here that can keep Pittsburg up."

Despite the continuous flood of bad news, people are still trying to remain positive and hope for a turnaround. Joe Sanderson said in his statement to shareholders that he expects the American people will again visit restaurants.

"People haven't quit eating out for the rest of their lives," he said.

Further Reading:

ENC Today on tough times for chickens.
WXVT15 News on the Petit Jean Poulty Plant closing.
CNN Money on Sanderson stock prices.

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!