A dose of reality
March 3, 2010
While assessing the state of the meat industry at the National Meat Association’s annual convention this past month, Smithfield Foods Inc. CEO and president, C. Larry Pope, admitted it’s difficult to summarize everything in one fell swoop.
When taking into account the state of the beef, pork and poultry industries independent of each other, one broad brush stroke doesn’t really tell the story. Species-specific circumstances and factors are at play and therefore the status of each segment is perhaps more different than ever, he said. Additionally, consideration must be given to the state of the production of livestock as well as the processing business. All of these segments obviously have very different dynamics impacting their current status.
For Smithfield, the sum of the various parts and factors impacting the industry is resulting in another challenging fiscal year. Citing losses in its hog production operations, the company reported a loss in its second fiscal quarter (ended Nov. 1) of $26.4 million, compared to income of $1.7 million in the second quarter of the previous year. Third-quarter results were scheduled to be announced in mid-March, with marginally better results expected by some analysts. In discussing the second quarter several months ago, Pope pointed out that some parts of the business are thriving for Smithfield. Its packaged-meats business, for example, delivered record quarterly profits. “This is a part of the business we have focused on and it has repeatedly delivered superior results,” he said.Making margins
Addressing attendees at the NMA conference, Pope said the past year has likely been positive for many companies, in large part because of the challenges facing producers. “The reason it has been good is partially because the livestock business has been so bad,” he said. “You’ve probably made some pretty darn good margins,” he said to his processing counterparts in attendance.
“I’m not sure that’s going to continue ,” he added, because the losses endured by livestock producers cannot continue much longer. What has to happen, he said, is “meat prices have to go up; that’s a fact of life. With corn prices expected to creep back up from $4 and $5 per bushel to upwards of $8, the cost will have to be passed along in the form of higher prices at the supermarket. “You can write that down – we will pay $8 again for corn,” Pope said.
Meanwhile, the cost of running processing businesses - from transportation to utility costs and insurance premiums - continue to increase as do pressures from retail customers to not raise prices. Leading the charge for resisting price increases is Wal-Mart Stores Inc., Bentonville, Ark. Pope pointed out the retailer recently informed its suppliers it will not allow price increases in the coming months in response to their customers’ demands. For processors enjoying positive margins as of late, Pope issues a warning to brace for leaner times to come. “If you haven’t gotten your house in order from a cost standpoint, I’m telling you it’s time to focus on it.”
In assessing demand in today’s market, Pope categorized it as relatively soft, especially in the foodservice segment, evidenced by the campaigns among most foodservice firms promoting bargain menu prices. It’s no secret that traffic at restaurants is down and has been for some time. “And the traffic that is coming in there wants to pay a lower rate,” Pope said. Therefore , he added, foodservice operators “are looking to all of us in this room to deliver them something cheaper.” This, too, fuels pressure on suppliers from the foodservice chains desperate to lure diners back to their tables. Presidential pushes
Pope said another challenge facing all segments of the industry is the Obama administration’s initiatives for the coming months. Plans by the Federal Trade Commission to further scrutinize proposed and previously approved mergers among agribusinesses and the Immigration and Naturalization Service putting employers on an even hotter seat when it comes to employment eligibility are just the tip of the iceberg, according to the Smithfield leader. Despite Smithfield volunteering to exceed the INS Basic Pilot program since it was conceived in an effort to prevent immigration raids at its plants, Pope said, “The INS is not our friend.” Likewise, he warned attendees, “The EPA is not your friend,” pointing out a recent proclamation by the Environmental Protection Agency that it is no longer in the business of working alongside industry. Cooperation, he said, was an attribute of the previous administration. He claimed the Obama-led approach to legislating is “the old administration was too lax on you, so what we’re going to do now is [we’re going to] write fines; we’re enforcing the law now,” and the days of solving problems are over. There are many legislators, he said, who think the industry’s successful, more prominent companies are inherently bad, adding, “that if Smithfield Foods went out of business, there would be people in Washington, D.C. who would pop champagne bottles.” The rest of the industry, at all levels, has cause for concern. “The Obama administration is not anybody’s friend,” Pope said, and issues such as childhood obesity and antibiotic resistance are unfairly being put on the front porch of the meat industry.
Part of what is driving such a hardball approach are a rash of inaccurate media reports portraying the food-production industries as profit-driven machines being led by money mongers,oblivious to foodsafety and ignorant of corporate responsibility. Citing Katie Couric’s two-day series looking at the use of antibiotics in the production of livestock as a prime example, Pope said, “The American people are being told that our food is killing people,” and he urged the industry to not sit by silently because industry opposition is coming from many sources and is even being instilled in the minds of the next generation.
Pope reported receiving scores of handwritten form-letters from gradeschool children urging him to stop making food that is unhealthy and unsafe. “Some teacher told some kids in that class to say that,” said Pope, which should be a concern to other processors. To blunt such biased messages being passed along to students by many educators, Pope recently challenged board members of the American Meat Institute to go to their local schools and tell them the real story about what the industry is doing and set the record straight in the minds of the next generation of consumers. “We need to get out there and tell them what we do,” Pope said. “There is a huge, huge misconception in this country that what we do is bad for them.”
Too often, and usually out of fear of what might be depicted, the industry resorts to the “ostrich approach” to shining the spotlight on itself when opportunities arise. One example Pope brought up was a recent attempt by producers at the History Channel to roll out a reality-type program depicting workers of a meat plant. After approaching many of the big meatprocessing companies, and being denied by all of them, the idea was scrapped because, as Pope stated: “We’re all afraid.” Addicted to exports
A significant factor inhibiting growth in the industry are U.S. companies relying too much on exports. Pope went so far as to compare the reliance to being “hooked on heroin,” because processors of all species are exporting more products than ever and when there is a trade interruption, havoc ensues. He said to ease the impact of export withdrawal, processors should focus on “reliable” trading partners (including Mexico, Korea and Japan, for example), while curtailing dependence on “unreliable” countries (such as China, Russia and, at times, Australia). Even among the intermittent partners, Pope says U.S. product is enthusiastically accepted as safe and wholesome by consumers, or “real people.” However, the food-safety perception of politicians is often based on an agenda, not science. For example, “The pork issue in Russia is a chicken problem,” said Pope.
Thanks to a weak U.S. dollar, most of the exporting markets for U.S. products are very strong, said Pope, admitting his company relies on exports for about 20 percent of its business.
In the future, China will likely steer the ship in terms of exports. “More than 50 percent of the world’s pork is eaten in China,” Pope said and that will bode well for pork exporters based in the U.S. for years to come.
As for the future of the industry, Pope predicted continued scrutiny on how business is being done and fewer questions about the attributes of the meat being sold. Processors today have to be ready to talk to customers about their animal-welfare policy, food-safety policy, antibiotics policy and community services while spending less time talking about their products. Referring to customers such as McDonald’s, Subway, Walmart and Kroger, Pope said, “If you’re selling to those customers, you know they’re asking those questions.”