US beef boom probably over, squeezing Tyson Foods
THE US beef boom is probably over. Thanks to tightening animal supplies and tepid demand, companies including Tyson Foods, the largest US meat processor, and Cargill are facing plunging profits on every head of cattle they slaughter.
That’s a sharp reversal of fortune from last year, when the fastest expansion of the American cattle herd in four decades increased margins for packers.
But, the herd growth didn’t last long. As a result, cattle futures in Chicago have rebounded 23 per cent since bottoming in midOctober, while the price packers get for wholesale beef has tumbled in the past year amid stiff competition from chicken and pork.
“It posts a pure squeeze on packer margins lower,” said Bob Wilson, a founding partner at industry researcher HedgersEdge.com in Greenwood Village, Colorado.
Losses for US beef packers expanded to US$ 67.15 a head on Jan 25, according to data from HedgersEdge.com. Profit per head reached an all-time peak of US$ 147.20 on Oct 18 and averaged US$ 43.79 in 2016, the highest for any year in records going back to 1990.
The margin reversal may be a blow to Springdale, Arkansasbased Tyson. In fiscal 2016, its beef segment rebounded to an operating profit of US$ 347 million from a loss of US$ 66 million a year earlier, with former Chief Executive Officer Donnie Smith calling it “a great turnaround story,” according to a statement on Nov 21.
The company’s shares have jumped 22 per cent in 12 months, closing at US$ 62.63 on Wednesday. They traded at US$ 62.06 at 11.26am last Thursday.
But, it doesn’t look like the beef turnaround is certain to last.
Analysts have lowered their consensus one-year target price for Tyson’s stock by 1.1 per cent in the last month, data compiled by Bloomberg show.
Heather Jones, a Richmond, Virginia-based analyst for Vertical Group, cut her rating on the shares to hold from buy in a report last Wednesday, citing a “rough start” for beef this year.
Jones still raised her profit estimate for Tyson’s fiscal first quarter, which spanned October through December, 2016.
She raised her outlook on earnings per share to US$ 1.36 from US$ 1.20, partly because of “strong” beef performance, though she is “somewhat more cautious” on the outlook for the segment’s margins for the subsequent three quarters. Tyson is scheduled to report fiscal first- quarter earnings on Feb 6.
Tyson and Cargill declined to comment on their beef margins.
Tyson’s beef division is its largest by revenue – US$ 14.5 billion in the year ended Oct 1 – but the smallest by profit. Still, the company has highlighted improvement from the business as a reason not to sell the unit. Tyson has a goal of pushing its adjusted earnings per share up as much as 10 per cent in fiscal 2017.
Beef processors have endured painful times before. Tyson and Cargill closed slaughter plants in the last several years after drought and higher feed costs forced producers to cull the national cattle herd to the smallest since the 1950s. Things started to improve as cheaper corn and better weather allowed for expansion over the last two years. A bigger US cattle herd helps improve plant utilisation, and processors were able to spread their costs across a greater number of animals. Demand for beef products also climbed domestically and internationally. — WPBloomberg