Market volatility leads to challenges, mergers

by Keith Nunes
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In the spring of 2006, the chicken meat market had reached a low point. Between March 29 and April 19, processors were faced with breast meat prices of approximately 70c per lb, down from 96.5c per lb in early February, and leg quarters were priced at 17c per lb, according to the Georgia Department of Agriculture’s Georgia Dock Quoted Prices for Whole Birds and Parts report. The situation was so dire, some processors were selling leg quarters to pet food manufacturers in an effort to reduce overall supply and prompt a rebound in prices.

The depressed chicken meat prices were caused by a combination of factors, including reduced level of exports due to international fears from highly pathogenic avian influenza and increased production from the industry’s largest players. As a result, companies like Tyson Foods, Inc., Springdale, Ark., and Pilgrim’s Pride Corp., Pittsburg, Texas, embarked on initiatives to make their operations more efficient and cut back production to limit supply.

In July, Tyson Foods announced an initiative to reduce costs by $200 million. The cost savings were to come from reductions in staffing, recruiting, relocation, consulting fees, sales related expenses, supplies and travel, according to the company.

In a recent interview, Richard Bond, president and chief executive officer of Tyson Foods, said the company’s cost management initiative is on track.

"We will meet or beat our objective based on what we see in place and how we see the rest of the year playing out," he said. "I am very pleased with how our team members have risen to the occasion and committed to these changes and to seeing this initiative through.

"What I believe has been a driver is trying to do away with non-value-added activities, thinking through what we’re doing, why and how we’re doing it and asking, ‘Is there a more efficient and effective way of doing it?’ That has been the key to its success, how to eliminate non-value-added activities."

Mr. Bond said 50% of the cost savings will come from Tyson’s chicken operations, 15% to 17% out of prepared foods, and the balance will come from the company’s beef and pork operations.

In the fall, chicken prices began to slide again and Pilgrim’s Pride announced it was cutting weekly chicken processing volume by 5%, or approximately 1.3 million head per week. The decision was an effort by the company to balance supply and demand amid declining chicken prices and higher costs for corn.

"We announced a 5% year-over-year reduction in supply that came into effect in January for our company," said O.B. Goolsby, president and c.e.o. of Pilgrim’s Pride Corp., during the Lehman Brothers High Yield Bond and Syndicated Loan Conference on March 26. "So the industry has adjusted production to give us the ability to pass on the extra cost of corn this year."

The U.S. Department of Agriculture’s Economic Research Service’s (E.R.S.) March 19 Livestock, Dairy and Poultry Outlook report reflects how the production cutbacks by Pilgrim’s Pride and others have affected the market. The E.R.S. lowered the first-quarter poultry meat production level by 75 million lbs to 8.75 billion lbs and the estimate for the second quarter was lowered by 50 million lbs, bringing the 2007 estimate to 35.9 billion lbs. The E.R.S. noted the prices for chicken products have strengthened and are "much higher" compared to the same time last year.

"We have a much better pricing outlook than what we have seen in past years," Mr. Goolsby said. "If you look at the boneless, skinless breast market, which is one of the leading indices of profitability in our industry, breast prices for January, February and March of this year are 40c plus ahead of where they were this time a year ago and favorably positioned to be able to take advantage of the increased demand that normally occurs in our industry after Easter. As the weather improves throughout the country, the consumption of chicken goes up and so we are at a level that we believe will lead to some very dramatic increases in breast meat as we go into the summer."

While the industry-wide production cuts have had the intended effect, Mr. Goolsby noted that the rising cost of corn has offset some of the positives.

"The corn price is going the wrong direction for meat producers," he said. "We have corn today around $4 a bu and if you look over our historic trading bands, that is very unique to us and it created a unique set of circumstances, and that was the reason for the reduced supply needed so we could pass this cost along."

Regarding corn, Mr. Bond said, "Corn is going to continue to be volatile. It is a highly volume-traded commodity now. The only thing that is for sure is that it is going to be volatile."

M&A activity high in segment

Mergers and acquisitions (M&A) in the meat industry spiked in 2006 in concert with a general rebound in M&A activity in the food industry, according to a review from The Food Institute. The organization’s report, "Food Business Mergers and Acquisitions 2006," listed 13 closed transactions and one announced but not closed for the year. Among the transactions: Advance Foods’ acquisition of Quick-To-Fix Foods, Cargill Meat Solutions’ purchase of four California beef companies now gathered under the Beef Packers name, U.S. Premium Beef/National Beef’s buyout of Brawley Beef, and Smithfield Foods’ acquisition of Sara Lee’s European meats businesses.

Others that have taken place include Pilgrim’s Pride’s acquisition of Gold Kist, Inc., Atlanta, and Smithfield’s acquisition of Premium Standard Farms, Kansas City.

The merger of Pilgrim’s Pride and Gold Kist, which took place in December, made Pilgrim’s the No. 1 chicken processor in the U.S.

"If you look at the landscape of the poultry industry today, it has changed dramatically over the last 10 years," Mr. Goolsby said. "Today, you have two public companies that control almost 50% of the market share."

One company currently on the block is Swift & Co., Greeley, Colo., a beef and pork processor. Last year the company announced it engaged JP Morgan Chase & Co. to assist it in a review of strategic and financial alternatives. The review was initiated as a result of a series of unsolicited inquiries from a variety of strategic and financial third parties, as well as currently robust capital market conditions.

Danielle Breuel, research and education director with The Food Institute, said meat and poultry companies are being acquired by a variety of interests — not just by other meat and poultry firms, but also by investment and capital groups as well as food distributors.

"One of the developments that caught our eye last year was ConAgra’s sale of Butterball and other significant assets," she said. "ConAgra also exited the seafood business."

ConAgra not only sold its Butterball brand and operations to a joint Smithfield-Maxwell Farms venture now called Butterball L.L.C. for $325 million, but also several other strong brands, including Armour, Eckrich, Longmont and Lunchmakers, to Smithfield for $246 million. In a separate transaction, ConAgra sold its Cook’s ham business to Smithfield for $260 million in order to focus "on those areas where the company has the strongest competitive position."

George Spilka, an investment banker with a national practice based in Pittsburgh, noted continuing interest in meat and poultry companies by investment funds.

"What’s driving it is a lot of things, but most important is that capital firms are awash in money," he said. "And on the distribution side you’ve got Sysco being very, very aggressive. I think you’ll see a continuation of that."

In 2006, Sysco picked up Desert Meat & Provisions, Las Vegas, as well as two distributors. In 2005, the $30 billion distributor and its subsidiaries made eight acquisitions, including Facciola Meat Co. in Fremont, Calif.

Moreover, Mr. Spilka sees no reason to think mergers and acquisitions in the meat and poultry arenas won’t continue spiking.

"I think we’re pretty far from the end-point," he said. "Food is probably a pretty safe place to be if you’re an investor. It’s pretty recession-resistant."

This article can also be found in the digital edition of Food Business News, April 17, 2007, starting on Page 1. Click here to search that archive.

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