In addition to annually rounding up millions of chickens, cows and hogs, the officers at Springdale-based Tyson Foods have to keep track of storms, floods, earthquakes, oil speculation and the planting and harvesting schedule of millions of acres of corn and other grains.
And when officers with one of the world’s largest meat processing and distribution companies talk about the effects of weather, earthquakes and inflation on the business, their views typically reflect what all players in the industry face.
The company reported Monday (May 9) that income in the second fiscal quarter was $159 million, unchanged from the same quarter in 2010. Earnings per share of 42 cents missed the 43 cents consensus of analyst estimates. Revenue during the quarter ended April 2 was $8 billion, up an impressive 15.67%.
Tyson Foods President and CEO Donnie Smith said Monday (May 9) during an earnings conference call that recent storms in Alabama caused the loss of less than 200,000 birds, a tiny amount compared to the 40 million birds a week the company places.
“Our hearts go out to the victims and they’ve been in my prayers. Tyson Foods was very fortunate considering the destruction in the area. Two of our plants in Northern Alabama were not damaged, although both lost electricity for a while,” Smith said during the conference call.
CORN PRICES, SUPPLY
Flooding in many parts of the Mississippi River tributary may also delay or prevent the planting of corn. If corn supplies become tight, companies like Tyson Foods — which feed millions of tons of corn to chickens, cows and hogs each year — will see spikes in one of their major input costs. The company is already estimating a grain cost increase of $500 million in 2011 compared to 2010.
According to a Monday (May 9) report from the U.S. Department of Agriculture, 40% of the corn crop is in the ground in the primary producing states, down from the 5-year historical average of 59% for this date. Also, 7% of the corn crop has emerged, down significantly from the historical average of 21%. Corn prices jumped more than 3% in trading on Monday, settling around $7.10 per bushel.
When asked during the conference call with market analysts if the company might use some of its cash to buyback stock, Tyson Foods Chief Financial Officer Dennis Leatherby said he is more interested in the flexibility of having enough cash to respond to changing market conditions.
“What if corn goes to $10? Those kinds of things, we really maintain a lot of liquidity, it’s $1.6 billion right now. We need to maintain a lot of liquidity,” Leatherby said.
OVERALL ECONOMIC ISSUES
As corn and other grain prices rise, the costs are passed on to Tyson Foods’ customers who in turn often raise prices on a consumer already struggling with higher gas prices.
“Now looking forward to the rest of the fiscal year, there is concern about crop plantings and what that might do to grain prices. We’re also concerned that if $4 or even $5 gas prices linger, it could have an impact on consumer spending. We’re feeling increased pressure from these market dynamics,” Smith said.
One of those dynamics is the food service industry, with which Tyson Foods generates a lot of business. Smith said earlier in the year he was optimistic the U.S. food service sector would grow in 2011. But economic trends — primarily higher fuel prices and the U.S. jobless rate rising from 8.8% in March to 9% in April — have him doubting his optimism.
“It’s going to be very tough for us to have a 5% or better operating income for this fiscal year. We’ve got a wall of costs coming at us. We’ve talked about grain prices, $500 million. Plus, you’ve got a lot of other raw inputs that we deal with. Freight, all of those things that increased costs, fuel costs, utilities costs, et cetera, healthcare costs, et cetera, et cetera, et cetera. So it’s going to be tough this year,” Smith explained.
GLOBAL SUPPLY AND DEMAND
Factors allowing Tyson Foods and other meat processing companies to raise prices and have them stick include the declining supply of domestically produced meat and increased export demand for U.S. produced meat.
Jim Lochner, Tyson Foods’ chief operating officer, said U.S. per capita protein supplies are expected to decline in 2011 — the fourth consecutive year for a supply decline. Combine the declining or flat supply with increased demand, the market creates a mechanism that supports higher prices.
“There is demand for our products, our global economy (is) willing to pay for them and supply is limited. This means our customers and consumers will continue to see increasing prices in general for protein products,” Lochner said.
Part of that export demand comes from Japan, which is having to restock food supplies following the powerful March 11 earthquake and subsequent tsunami that devastated large parts of the country.
“The export demand out of Japan has remained very strong, so we’ve certainly seen no pullback, if anything, we continue to see strong interest upfront,” Lochner said when asked about the post-earthquake export situation with Japan. “The information I got from our team is that it’s continued strong post-earthquake and there will continue to be a replenishment and continue to be consumption.”
Michael Tilley with our content partner, The City Wire, is the author of this report. He can be reached by e-mail at email@example.com.