Tyson Foods and its poultry competitors keep one eye on the grain markets at all times and in recent weeks the two main feed ingredients for chickens — corn and soybean meal — have been on the rise.
Corn pushed above $4 per bushel and soybean prices have rallied behind strong export demand out of China. Soybean Meal, the byproduct fed to chickens, has also moved higher, according to commodity analyst Matt King with Arkansas Farm Bureau.
King said dry weather in the Midwest, predominantly Iowa, has stressed the crops in the western half of the corn belt. He said much of the corn planted in that region is pollinating and moisture is needed to promote the kernel growth. Without some rain in the next few days, King said much of the planted acreage could see reduced overall yields.
He said with oil trading around $45 a barrel, speculators have sought to turn a fast profit in grain commodities. He doesn’t think investor demand is long lived and said most of the corn grown in Arkansas is already under contract at decent prices. He said Tyson Foods likely has bought its corn supplies with futures and hedged against any major uptick in pricing of corn.
With lower corn and soybean prices, Tyson Foods has managed to add to its profits over the past few years. In times of relatively stable commodity pricing, Tyson Foods execs have said the company stays close to the market with a limited need to hedge. Tyson executives have said they can make decent money with $4 corn, but it’s volatility in the market that creates the biggest challenge.
Speculators can create volatility when they buy or sell large grain contracts in conjunction with already tense natural market conditions. King said he doesn’t think there is much upside potential now in the market. He said a rain or two in the corn belt can cool the hot market and take corn prices back to $3 or lower and soybean between $9 and $9.50 per bushel.
Higher grain costs crimp processing margins for Tyson and its competitors. Analysts with BidaskClub recently cut the rating on Tyson Foods from a “buy” to a “hold,” saying the risk is real and not already baked into the stock price multiples. Zacks Investment Research also recently downgraded the stock to a “hold” position. Last month JPMorgan Chase analysts raised their target price from $62 to $67 but kept the neutral rating.
More bullish analyst Kenneth Zaslow with BMO Capital Markets upgraded Tyson Foods to a “buy” and issued a $75 price target on June 15. One year ago, Zaslow downgraded Tyson on similar grain cost fears amid higher soybean meal prices.
Tyson Foods’ share price did begin to recover from its downward slide over the past two weeks. Tyson shares (NYSE: TSN) closed at $59.92, up $1.34 on Wednesday. At the start of July shares were trading around $62.80, before falling to as low as $58.42 on Tuesday (July 11). Over the past 52-weeks the share price has ranged between $55.72 and $77.05.
The U.S. Department of Agriculture released this week its corn and soybean outlook for this growing year. The reports shows larger supplies are likely around the world but so is the demand for feed and residential use. USDA lowered its forecast of the season average corn price by 10 cents a bushel. They peg cash corn to range between $2.90 and $3.70 a bushel through early 2018. USDA raised its corn production forecast for 2017-18 by 190 million bushels, based on increased planted and harvested areas from the June 30 Acreage report.
In the same report soybean production is projected at 4.26 billion bushels, up 5 million on increased harvested area. Despite slightly higher production, 2017-18 soybean supplies are reduced by 35 million bushels on lower beginning stocks and strong exports. Soybean exports for 2016-17 are projected at 2.1 billion bushels, up 50 million, reflecting shipments and outstanding sales through early July. The U.S. season-average soybean price is forecast at $8.40 to $10.40 per bushel, up 10 cents at the midpoint. Soybean meal prices are forecast at $300 to $340 per short ton, up $5.00 at the midpoint.
One of the hottest commodities this year has been pork bellies, which companies like Tyson Foods use to make bacon. Pork belly prices are up 71% this year, according to commodity research firm Urner Barry. Processors like Tyson Foods have had to raise bacon prices. Urner Barry said the average retail brand level bacon price is up 21% through the first half of this year.
Bacon consumption is the highest in the summer which also correlates with the lowest production period for the meat. Russell Barton, an analyst with Urner Barry, said robust demand through last winter meant there were no extra supplies moving into cold storage, meaning industry supplies were not fully replenished before the spring and summer demand hit.
According to U.S. Bureau of Labor Statistics data, the average price of a pound of sliced bacon has remained at or above $5.69 per pound nationally in the past three months, which are levels not seen since 2015. Average national price of bacon rose 60 cents per pound in the first five months of 2017, which is equivalent to about 12%.
Consumer analysts said there is a breaking point for most consumers and people will buy less. Nielsen tracks bacon sales and found there have been several months this year where bacon sales have slowed, April and May each saw lower bacon volume sales.
Tyson Foods must source the hogs it slaughters for its pork meat business. Rising belly prices allow Tyson Foods to increase bacon prices which could help offset any uptick they have seen in overall hog prices should the supply imbalance linger. But Tyson has to delicately manage price hikes to avoid reducing consumer demand. Analysts said retailers also likely taking some hit on their margins for bacon this summer.