Tyson Foods faces unparalleled market conditions

by Editorial Staff
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SPRINGDALE, ARK. — The cost of feeding the chickens that form the foundation of Tyson Foods, Inc.’s business has taken a toll on the company. In November, executives projected an additional $300 million in feed costs for fiscal 2008, but revised that figure in late January and now expect it to exceed $500 million. Unable to raise chicken prices fast enough, Tyson Foods has withdrawn its previously issued earnings guidance for fiscal 2008, citing the "unprecedented times" as the reason.

For the first quarter of fiscal 2008 ended Dec. 27, Tyson Foods had net income of $34 million, or 10c per common share. The result is a decline compared with the first quarter of fiscal 2007, when the company had net income of $57 million, or 17c per common share. Sales for the first quarter were $6,766 million during 2008 compared with $6,558 million for the same period during fiscal 2007.

"The continued escalation of grain prices, driven largely by government mandates for corn-based ethanol, has caused a domino effect for other inputs," said Richard L. Bond, president and chief executive officer of Tyson Foods, Inc. "Cooking oil, flour and other feed ingredients are all on the rise. For the foreseeable future, consumers will pay more and more for food, especially protein, because grain represents a proportionally higher percentage of input costs compared to other foods.

"The commodity markets affecting our business are extremely volatile and fluctuating tremendously on a daily basis. For this reason, we have decided to temporarily withdraw our previously issued earnings guidance. In this erratic and unpredictable operating environment, it is virtually impossible to make meaningful earnings forecast assumptions."

Tyson Foods announced it will be implementing price increases to offset the rise in feed costs.

"Chicken prices haven’t kept pace with other food staples," Mr. Bond said during a conference call with financial analysts on Jan. 28. "Eggs are up 38%, milk is up 30% and whole wheat bread is up 12%. As a percentage of input costs, grain is much higher for protein than it is for other products. We have no other choice but to raise prices substantially."

The initial impact from rising feed prices has been felt in Tyson’s chicken business, but Mr. Bond said that doesn’t mean it won’t be felt elsewhere in the company.

"Even though we, generally speaking, don’t participate in cattle or hog production in a big way, eventually those high input costs are going to affect the numbers of cattle and the number of hogs that will be available for us to process in the long term," he said.

Of Tyson’s four business segments, Chicken, Pork and Prepared Foods reported positive operating income for the quarter. Its Beef segment continued to be hampered by difficult market conditions.

"For Q2, we believe Pork and Prepared (Foods) segments will continue to perform well," said Wade Miquelon, executive vice-president and chief financial officer, during the conference call with analysts. "Beef will continue to improve and the dramatic rise in input costs is likely to move chicken to a loss position in the short term."

Chicken segment sales were $2.1 billion and operating income was $35 million. Improved average sales prices were a driver for the segment, but were partially offset by decreased sales volumes due to the sale of two poultry facilities in fiscal 2007.

Sales within the company’s Pork segment were $835 million, and it had an operating income of $76 million. The Prepared Foods business had sales of $676 million and operating income of $32 million.

Tyson’s Beef business had sales of $3.1 billion and a loss of $85 million in the first quarter. High prices for cattle combined with operating cost inefficiencies were cited by the company as reasons for the loss.

Slaughter to cease in Emporia

To improve operating efficiencies, the company announced Jan. 25 it was ceasing slaughter operations at its beef facility in Emporia, Kas. The plant will continue to operate as a cold storage warehouse and process ground beef. It also will be used to take over the processing of certain commodity products in an effort to improve operating efficiencies at several other Tyson facilities.

"There continues to be far more beef slaughter capacity than available cattle and we believe this problem will continue to afflict the industry for the foreseeable future," said Mr. Bond on Jan. 25. "We estimate the current slaughter overcapacity in the industry to be between 10,000 and 14,000 head of cattle per day.

"This imbalance is especially a problem for Emporia. Cattle production has moved from eastern to western Kansas over the past 20 to 30 years, and the Emporia plant is no longer centrally located in relationship to where most of the cattle it slaughters are raised."

The discontinuation of slaughter operations will result in the elimination of approximately 1,500 of the 2,400 jobs currently provided at the Emporia plant. This will include people employed in first and second shift slaughter, as well as second shift processing.

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