NEW YORK — Rising corn prices are less of a risk for meat and poultry producers now than they were in 2008, primarily because producers are better prepared for these rising costs, according to a recent report from Fitch Ratings here.
“Fitch upgraded Tyson Foods Inc. and Smithfield Foods Inc.'s ratings earlier this year, despite the recent run-up in corn prices. … Moderate near-term margin deterioration is anticipated and has been factored into ratings. However, reduced financial risk resulting from significant debt reduction, along with a favorable supply/demand backdrop, should prevent severe declines in credit quality,” the report states.
Basically, many major producers are in much better shape than they were in 2008, when corn prices hit record highs, even as wholesale prices for meat and poultry were pressured down due to an oversupply situation.
But the industry enjoyed a great year in 2010 when feed prices were low, supplies were tight and pricing was strong. Producers including Tyson, Smithfield and Pilgrim's Pride used the improved cash flow as an opportunity to pay down debt and streamline their operations. Tyson and Smithfield each paid off about one-quarter of their total debts last year, and Pilgrim's debt is 35% lower than when the company filed for bankruptcy at the end of 2008, the report notes.
All producers have not benefited equally. Agristats, a statistical research and analysis firm serving the agribusiness industry, recently noted that most producers in the U.S. chicken industry have been losing money this year. Sanderson Farms recently announced plans to delay the construction of a new facility due to rising feed costs, and Cagle's announced a 20% cut in production after significant losses during its fiscal third quarter.
During a first-quarter 2011 earnings call, Donnie Smith, president and chief executive officer of Tyson, responded to an analyst's question about the difficulties facing some of the company's smaller competitors. He downplayed improvements in Tyson's grain hedging processes and instead cited enhancements that the company has implemented throughout its business during the past two years.
“I'm not going to give credit to grain purchasing or production cuts as a reason for [Tyson's] improved performance,” he said. “The reason our performance is better is we're running a better business. Our yields are better, our line efficiencies are better, our labor efficiencies are better, our mix is better.”
Unfortunately for retailers and consumers, the ability of major meat companies to weather another spike in the price of animal feed may make the market much more stable than it was in 2008, but it won't translate into lower prices this year.
In Smithfield's most recent quarterly report, released this month, the company said it expects spiking grain prices to drive hog-raising costs steadily higher this year and next. If smaller producers continue to struggle with high feed prices, their production cuts, in aggregate, will ensure that domestic meat and poultry supplies remain tight, which will continue to push wholesale prices higher.
And, unlike 2008, “favorable supply/demand conditions and a recovery in consumer spending are helping to support prices for the [meat and poultry] industry,” the Fitch Ratings report notes. Meat and poultry consumer price inflation is forecast to rise 2.5%-5% during the current year, the report adds, citing U.S. Department of Agriculture estimates.
Citing food price inflation and likely increases in the price of gasoline, Smith said Tyson is expecting consumers to remain cautious, and total meat and poultry volume to remain flat until 2012.