Tyson Foods Could Benefit From Cargill Plant Closure

by Kim Souza (ksouza@talkbusiness.net) 23 views 

Tyson Foods and the rest of the beef packing industry got a boost Thursday (Jan. 17) as competitor Cargill announced plans to close its Plainview, Texas, processing plant effective Feb. 1.

The announcement was no surprise to industry analyst Steve Kay, publisher of Cattle Buyers Weekly.

“Given the historic low cattle supplies in the plains region there was excess processing capacity. Tyson and JBS each have two plants and Cargill had three plants that rely on fed cattle in this region. Supplies that are said to be down between 500,000 and 700,000 head because of drought,” Kay said.

Roughly 2,000 employees work at the Plainview plant. Cargill said the company will work to help these displaced worked find open positions at Cargill as well as other employers.

“The decision to idle our Plainview beef processing plant was a difficult and painful one to make and was made only after we conducted an exhaustive analysis of the regional cattle supply and processing capacity situation in North America,” said John Keating, president of Cargill Beef, in Wichita, Kan. “We were compelled to make a decision that would reduce the strain created on our beef business by the reduced cattle supply.”

“The U.S. cattle herd is at its lowest level since 1952,” Keating added. “Increased feed costs resulting from the prolonged drought, combined with herd liquidations by cattle ranchers, are severely and adversely contributing to the challenging business conditions we face as an industry. Our preference would have been not to idle a plant.”

Kay said Cargill operates another beef packing plant just 70 miles from Plainview at Friona, Texas.

“The closure of the Plainview plant, now gives the three largest packers an even number of plants in this region — two each,” Kay said. “This will no doubt be a benefit for Tyson and others for the next six months to a year, ensuring they have enough cattle to run their businesses at decent capacity.”

Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist, recently forecast U.S. beef production to decline 4.8% in 2013. He says this will be the second largest year-over-year decrease in 35 years.

Peel expects carcass weights to be steady but projects a 5% or more decrease in cattle slaughter, because of fewer cattle.

Beef production in 2012 declined by approximately 1.1% compared to 2011, with a 3.3% decrease in slaughter, which was partially offset by a 2.3% increase in carcass weights.

The industry does not expect the U.S. cattle herd to significantly increase in size for a number of years.

“We delayed the decision to idle Plainview as long as possible, due in part to our outstanding team and ongoing excellent support from the community,” Keating said. “We were also hoping the drought would break, pasturelands would be restored, cattle ranchers would retain heifers and the national herd trend of declining numbers over the past few years would be reversed.

“Unfortunately, the drought has not broken, feed costs remain higher than historical averages and the herd continues to shrink. The industry has experienced this cycle in the past, although this one is longer and more severe than most.”

Keating said this plant idling will allow the packer to run its other plants in the region on five-day week basis.

Tim Ramey, analyst for D.A. Davidson & Co., says the this closure probably will have a positive impact on industry margins, given less competition for cattle. He rates Tyson Foods a buy position indicating shares will outperform the market as a whole in the next year.

Tyson Foods shares rose to a 52-week high Thursday, closing at $21.23, up 3.76%.

Jim Lochner, chief operating officer for Tyson Foods, said in November he expected adequate supplies for cattle for its beef plants. But, he also said there may be periods of imbalance and its beef-segment profit may be below its normal range of 2.5% to 4.5%.

Tyson Foods will report its fiscal 2013 first quarter earnings before the market opens on Feb. 1. The Springdale-based meat giant will also hold its annual shareholders meeting the same day.