Dec. 17, 2012
by Joel Crews
While certain market challenges were apparent coming into 2012, each year there are unforeseen issues that blindside the industry – and this year was no exception. Shrinking supplies, unsteady demand and passing along higher prices to customers were just some of the realities meat and poultry processors were braced for heading into the New Year. But no one could have seen the costly effects of a historic drought that would deal a crippling blow to the industry at mid-year. Likewise, nobody predicted the disastrous impact of media reports misrepresenting the production of lean, finely textured beef (under the misnomer of “pink slime”) used in ground beef supplied to retail outlets and quick-service restaurants. Adding insult to injury, was the decision by the Environmental Protection Agency to deny requests to waive the Renewable Fuel Standard, further pressuring prices on livestock feed in the wake of the devastating drought of 2012.
Through it all, many high-profile companies managed to realize higher sales in the year and in some cases, profitable results, due in most cases to the success of value-added and packaged meat programs. This year’s media events and market conditions in the US pushed some company’s into bankruptcy, forced some plants to shut down, while others looked to opportunities outside the country, where the price of doing business is more favorable.
Feeling the fallout
As recently as last month, JBS SA, based in São Paulo, Brazil, announced some good news tempered with bad news, indicative of the challenges facing US processors. As part of a plan to bolster its beef production in Brazil by 15 percent, JBS will start up six new slaughtering facilities, adding 1.2 million head to its capacity by mid-year and up to an annual capacity of 2 million head by the end of 2013.
During a conference call announcing the results of its fiscal third quarter, which included a quarterly profit of $178 million, CEO, Wesley Batista said the forecast for beef production in Brazil is exceedingly positive.
“The cost of raising an animal in the United States is twice the cost of raising an animal in Brazil. So, they are reducing the size of their herd,” Batista said, due in large part to the drought-induced rise in feed costs.
Meanwhile, Dakota Dunes, SD-based Beef Products Inc., a manufacturer of lean, finely textured beef (LFTB), announced this past May it would close three of its plants. The company made the decision after demand for LFTB diminished as a result of media reports called into question the safety of the FDA-approved product.
Also sent reeling from the challenging market conditions in 2012 was Fresno, Calif.-based Zacky Farms, which filed for Chapter 11 bankruptcy protection in October. The processor of turkey and chicken cited skyrocketing feed costs as the cause of its financial hardship.
A perfect storm
Reacting to the widespread drought in much of the US, most livestock producers brought their animals to slaughter early rather than endure the higher feed costs, which served to shrink the nation’s herd. During the Kansas Livestock Association’s annual convention this past month, Randy Blach, vice president of CattleFax told attendees how the worst drought in nearly 100 years has resulted in the US cattle herd size shrinking by as many as 1 million head. He also said consumers should expect to pay up to 8 percent more for meat in the coming year, thanks to the summer’s conditions.
According to many processors, curbing the rising price of meat was dealt a costly blow when the EPA denied industry-wide requests to waive the Renewable Fuel Standard, creating more pressure on feed prices by mandating increased ethanol production. Responding to this decision, Donnie Smith, Tyson Foods president and CEO, bristled, saying: “The decision is a disappointment and frankly, I think it’s a disservice to US consumers. Our nation just experienced one of the worst droughts in almost 50 years and yet it didn’t seem serious enough to give US consumers a relief on higher food prices.”
Smith’s comments came as Tyson reported its end-of-year results for fiscal 2012 this past month. The company reported income of $583 million, equal to $1.64 per share on the common stock, which compared with income of $750 million, or $2.04 per share, during the previous year. Sales for the year were $33.3 billion, up 3 percent from $32.3 billion. The declining income and EPS were directly attributable to the volatile commodity markets.
Smith said during an earnings call that the company achieved record sales in the face of challenging market conditions. “Fiscal 2013 is likely to be equally, if not more, difficult,” he said, “but there will always be challenging circumstances in this business.”
In fiscal 2013, Tyson Foods is anticipating an incremental $600 million in feed ingredient costs. Tyson’s Chicken segment led the charge in fiscal 2012, with operating income of $446 million during the year, up 171 percent from $164 million during the previous year. Sales for the segment were $11,591 million, up 5 percent from $11,017 million.
Sales in the Beef and Pork segments at Tyson posted improved results, but were compromised by challenges in the commodity markets. Operating income within the Beef segment was $218 million, down 53 percent from $468 million during the previous year. Sales for the Beef segment were $13,755 million, up 2 percent from $13,549 million during the previous year.
The Pork segment posted operating income of $417 million, down 26 percent from $560 million during the previous year. Sales for the segment were $5,510 million, up 1 percent from $5,460 million.
Commenting on the fiscal 2012 earnings decline, Smith said Tyson Foods made some “missteps” during the year. Additionally, some losses were related to the company’s global operations, but he said he expects improved results in the coming year.
“Our start-up operations in Brazil and China lost a little over $100 million in fiscal year ‘12,” he said. “In China, as we bring on more company-owned housing in 2013, allowing us to move more of our mix away from wholesale and into more desirable channels, we will reduce our losses substantially. .
“We made some missteps in parts of our domestic business that cost us, too, Smith said. “Even with these missteps we still had very strong results in 2012.” He said the company learned from these mistakes.
“We won’t be making them again, which gives us a head start on 2013,” he added.
In early September, C. Larry Pope, president and CEO of Smithfield Foods, reported 2013 fiscal first quarter earnings of $61.7 million or $0.40 a share compared with $82.1 million or $0.49 a share during the same period the previous year.
Sales for the quarter were $3.091 billion, a very slight decline compared with the first quarter of fiscal 2012 when sales were $3.094 billion.
In his comments on the company’s first-quarter performance, Pope referenced the rising cost of production and the impact on business during the quarter.
“On the operating side, our results reflect the ongoing turmoil in all protein and grain-based businesses today, high volatility and increasing cost of production primarily tied to higher grain costs,” he said. He went on to say that while the company’s hog production business got off to a profitable start in the first quarter, its fresh pork results were “disappointing.” Pope cited the influence of high-priced product and the challenge of a surplus of up to 3 percent more meat to sell this year in a sluggish retail environment.
“We did not have a good quarter in fresh pork,” Pope said. “As most of you know, the summer months are generally the worst months of the year for fresh pork, and that was the case this year.”
Pope concluded, by saying that he expects better days ahead in the remaining three quarters of Smithfield’s fiscal year. “While I’m not nearly satisfied with this quarter’s results, I am not really worried about fresh pork and fully expect fresh pork profitability to be fine for the year.”
During a Nov. 20 earnings call, Jeffrey Ettinger, president and CEO of Austin, Minn.-based Hormel Foods, referenced his company’s outlook on 2013 as it reported positive results for the end of its fourth quarter and for the fiscal year. For the year, Hormel reported earnings of $1.86 per share, a 7 percent increase over the previous fiscal year. He pointed out that for the first time in the company’s history, sales exceeded $8 billion, topping out at $8.2 billion for the full year, a 4-percent increase over the previous year.
Top of mind for the company in 2013 are higher grain costs and volatile protein costs and processing margins, Ettinger said.
“We plan on reducing our harvest levels in both our Jennie-O urkey Store and Refrigerated Foods segments by 1 percent to 2 percent,” as a means of limiting Hormel’s exposure to the rising commodity costs. “We will also continue to take strategic and modest price increases where we need them,” he said.