story by Kim Souza
ksouza@thecitywire.com
The U.S. meat industry got off to a good start in 2015 and Tyson Foods is one of several meat companies expecting strong earnings this year behind higher demand for chicken and better pork profits. The beef market is likely to remain tough for processors.
Fitch Ratings recently noted the positive trends expected for the meat industry, citing “good demand and lower costs for feed. The analysts said the gains will be offset by a tepid beef market as ranchers are in the midst of rebuilding their herds. The growing consumer bias toward protein-rich foods and improving U.S. economy are likely to support the meat industry this year, the rating company analysts noted in their report.
“However, near-term uncertainty exists for exports due to a strong dollar, China’s ban on U.S. chicken, and disruptions at West coast ports,” Fitch added. “The smaller freezer stocks for chicken, beef and pork all remain down compared to the prior year leaving no immediate backup in supply and the potential for stronger prices for proteins in 2015.”
Tyson Foods has already completed its first quarter of fiscal 2015 and is now about a third of way through the second quarter. The Springdale-based meat giant will report its first quarter earnings before the market opens on Friday (Jan. 30).
Wall Street expects 73 cents per share of net earnings, a penny over the year-ago profits. That would be total net income of about $280 million for the quarter compared to $254 million in the same period of 2014. Sales revenue is expected be $10.35 billion for the quarter, up compared to $8.76 billion a year ago. The revenue boost of 18.1% largely from new revenue from the $8.5 billion acquisition of Hillshire Brands last fall. Tyson Foods’ execs expect 2015 revenue to top $42 billion.
HIGHER MEAT PRICES
Also working in Tyson’s favor is the added disposable income bump in consumer pockets from lower gasoline prices. The U.S. Department of Agriculture expects Americans will dole out 3% to 4% more this year for the meat, chicken and fish they purchase.
The higher prices are expected despite increased production by the poultry and pork industries as they seek to fill the market opening with reduced beef processing.
Steve Kay, publisher of Cattle Buyers Weekly, said consumers will likely pay more for chicken and pork even though production and supplies will be up. He said beef production will be down and prices will rise, although not likely to record levels of 2014. The USDA forecasts beef prices will increase 4.5% to 5.5% this year, less than the 11% to 12% increase it forecast for prices in 2014 versus 2013.
Kay said this should be positive for fed-beef processors like Tyson Foods as they might have to pay record prices for live cattle in the first half of the year and will need to get higher boxed-beef prices as a result.
Kay said the chicken and pork markets are set up to bring higher profits for processors in 2015, but beef profits will be light.
“Fed-beef processors have just come off their toughest fourth quarter in years, with operating margins negative by $80 per head at times. The first quarter may be a repeat of this, as occurred in 2012’s first quarter,” Kay said.
He expects Tyson’s chicken segment to achieve a 10% operating margin in 2015 as the company projects to save an additional $350 million in grain costs this year compared to 2014.
PRICES, CONSUMPTION
Consumers may see between 4.5% and 5.5% price increases in pork this year according to the USDA. The government expects chicken prices to increase 2.5% to 3.5% despite an anticipated 3% jump in chicken production.
The average national price of a wholesale broiler is expected to be flat around $1.05 per pound this year. Broiler exports will be 7.4 billion pounds down slightly from versus from 7.319 billion pounds in 2014.
Consumption expectations also favor chicken and pork in 2015. The USDA forecasts that consumers will eat about 2 pounds less beef per person this year. The government projects chicken consumption will rise to an average 85.3 pounds per person, a gain of 1.9 pounds. Consumers will also eat 45.3 pounds of pork, 1.3 more pounds this year according to USDA projections. Turkey consumption is expected to be flat at 0.9 pounds per person.
TYSON FRESH MEAT
With U.S. pork production heading up this year to 23.62 billion pounds, Kay expects live hog prices to drop to $65 per hundredweight. A year ago the prices were $76 per hundredweight.
“Last year, Tyson Foods had its second-best pork year since it acquired I.B.P. in 2001. Margin for the year was 7.2% versus 6.1% in 2013. Tyson expects its pork margin in fiscal 2015 to be in its normalized range of 6% to 8%,” Kay noted.
He expects Tyson will take a cautious approach to increased production in 2015.
The USDA expects beef production to dip to 23.665 billion pounds this year, a drop of 3.47% from 2014. The average live price of a fed steer will be $154 to $165 per hundredweight versus $154 to $155 in 2014.
Kay said beef exports will be slightly lower at 2.525 billion pounds this year.
“Tyson, the industry’s largest fed-beef processor, had its best beef year in 2014 as sales were a record $16.177 billion versus $14.400 billion,” Kay wrote.
He expects beef margins in 2015 will be slightly below last year’s levels noting that Tyson expects cattle supplies to decline 4% in fiscal 2015 from 2014.