The company predicts demand for chicken and pork will stay ahead of increased raw material supplies.

SPRINGDALE, ARK. — Tight raw material supplies have defined the meat and poultry category for the past few years. The national cattle herd, which has been at historic lows, combined with a hog market hindered by the effects of the PEDv virus, and a chicken segment struggling to grow supply, have proven profitable for manufacturers. But now it appears the tide may be turning and companies like Tyson Foods are strategizing on how to address the shifts.

The U.S. Department of Agriculture estimates chicken production may increase 3% during the year, but Donnie Smith, president and chief executive officer of Tyson Foods, said more recent data may indicate a greater increase in supply. He also estimated hog supplies may increase 2% to 3% during the year. Only the beef market is expected to remain tight as producers work to grow the national herd.

“In terms of beef, the supply will probably be flat to down 1% again in the next year and I think it may take four or five years to rebuild the herd back to the 2013 level,” Mr. Smith said in a conference call with securities analysts on Jan. 30.

With more chicken and pork available for processing, it stands to reason additional pressure will be on meat processors to maintain margins, and Mr. Smith believes his company is in a position to do so.

“…We believe demand will more than keep pace,” he said about the chicken market. “With this strong demand, a shift to a more profitable mix, strong pricing, and increased further processing capacity, we now think our return on sales will be above 11% for the remainder of the year. There looks to be more chicken supply to come in 2016, as well, and we’re working on plans to capitalize on it. We created our buy-versus-grow strategy for this scenario and we see it as an opportunity to value up.”

Mr. Smith added that the company stands to benefit if pork prices decline as it will provide a benefit in its Prepared Foods business unit, which now includes the recently acquired Hillshire Brands.

Donnie Smith, president and chief executive officer of Tyson Foods, estimated hog supplies may increase 2% to 3% during the year.

With regard to the macro trends affecting the food and beverage category, Mr. Smith called improved consumer confidence and unemployment data as well as lower gas prices tailwinds for Tyson Foods.

“We continue to see consumers moving from red meat to poultry and 68% say the cost of red meat is the reason they’re making a shift,” he said. “However, beef prices have remained at record levels because demand has been so strong among people who can afford it.

“Chicken is the only protein to grow annual consumption during the past four years. Lower fuel prices appear to have benefited food purchases, both at grocery and food service, mainly at Q.S.R. (quick-service restaurants) and casual dining, which saw traffic growth in our Q1 for the first time since the recession. There is also positive growth in on-site food service, such as lodging, deli, and health care, where we have a strong presence.”

Mr. Smith added that if lower gas prices continue into the summer, food service could see even more recovery.

“Seeing casual actually grow traffic for the first time since the recession is a very good sign,” he said. “Frankly, if you take out one large Q.S.R., Q.S.R. grew by 3.6%. There’s a lot in that. It’s interesting to note, in food service, that you’re seeing the younger brands outperform the more mature brands. That’s an interesting dynamic that we’ll be able to take advantage of.

“One other thing, I mentioned off-site. We have a very strong presence in deli and retail and that business is very, very strong. We’re seeing like 3.5% growth in deli. You’re seeing lodging and these other off-site categories grow by 3.5%, where we have, by the way, a very strong presence.”

But despite his assurances demand would out strip supply, several analysts who participated in the call were wary of the impact greater supply may have on earnings.

“With our pricing structures and the balance of how we go to market, we’re still in good shape if (chicken) supply increases above what a 3% excess might indicate,” Mr. Smith said. “Our buy versus grow strategy is we care a lot more about how much chicken we sell than how much chicken we grow. If you look at the last three weeks, supply, slaughter, we’re over 1 billion slaughter pounds.

“Since the beginning of the year, slaughter has increased something on the order of 7% and if you look at particularly front half pricing, wings, tenders, and breast meat, that's up 15%. So there's every indication that demand is more than going to offset the supply increases.”