Improving chicken margins should hoist Tyson Foods’, poultry industry profits

BMO Capital Markets analyst Kenneth Zaslow is predicting rising prices for breast and wing meats and lower feed costs after what was a sluggish quarter for chicken processing margins among the nation’s poultry industry.

This is good news for Tyson Foods and Arkansas’ poultry industry at large. Zaslow recently outlined his predictions in a note to investors citing an improvement in chicken cutout prices and overall processing margins for the first time in four months. Cutout refers to the value of the sum of all the chicken parts. In November the chicken cutout prices fell to their lowest level in five years, eroding the operating margins for many processors.

Zaslow expects eggs sets to slow in the coming months which should also pull back overall production helping to push prices higher on the spot market. One exception would be large bird processors whom he said most likely still continue to see operating losses. Springdale-based Georges and Fort Smith-based O.K. Foods operate mostly large bird processing in Arkansas. Tyson’s plant in Green Forest is also a large bird processing complex, but the majority of its plants process smaller birds.

He said leg-quarter prices appear to have stabilized despite export markets remaining slow to reopen following numerous bans stemming from the spring avian influenza outbreaks.

Based on the Georgia Dock pricing leg-quarters garnered about 34 cents a pound this week, while drumsticks brought 37 cents a pound. Leg-quarter prices are down from 52 cents reported a year ago. Drumstick prices have tumbled 35% from a year ago when they brought 57 cents a pound.

Zaslow believes breast meat and wing prices have about bottomed out at their seasonal lows of the past few weeks $1.47 a pound and 96 cents a pound, respectively, according to the Georgia Dock pricing index. Breast meat prices are still 25% cheaper than a year ago, while wing prices are down 22% year-over-year.

He expects 2016 industry production to increase between 2% and 3%, reflecting some increase in processing capacity and limited shifts from smaller bird sizes to big birds, which are predominantly used in food service.

Zaslow likes the prospects he sees at Tyson Foods, rating the company a “buy” despite the exposure it has in beef. He forecast earnings growth of 10% for Tyson Foods over the long term, saying the company has the ability to generate 10% chicken margins in fiscal 2016. He also predicted Pilgrim’s Pride would weather near-term margin pressure and benefit from rivals’ production cuts.

Much of the poultry industry’s profits depend on consumers’ appetites and willingness to pay higher prices for premium cuts of meat. A new monthly report by Oklahoma State University indicates that consumers are still not willing to pay more for most food products. One of the categories where consumers were not willing to pay for meat was in chicken wings, which typically do increase in cost this time of year. Wings are a popular snack food throughout the football playoffs, picking up again for March Madness and staying in favor for much of the summer picnic season. With wing prices rising out of their seasonal lows experts say consumers could shift their preference to breast meat and beef and turkey burgers given that consumers said they are willing to pay more for these meats.

The OSU report also noted that consumers expect lower meat prices than they did a month ago in December. They also report expecting to buy less chicken, beef and pork compared to last month, while plans for eating out fell relative to December. Over the past few months researchers at OSU said consumers have reported that their main challenge was finding affordable foods that fit within their budget. Finding time to cook at home and finding food children will eat was their least concern.