SPRINGDALE, Ark. – The promise and the peril of an outbreak of African swine fever (ASF) in China was evident during Tyson Foods Inc.’s second-quarter financial earnings call. The promise may be seen in how meat protein markets may move due to the culling of Chinese swine herds to stem the spread of the virus. The peril is in what may happen if the virus spreads elsewhere around the world, including the United States.
Tyson Foods’ scale and diversified product portfolio will help it weather global shifts in meat protein demand. If the virus reaches the United States, both the company’s Pork and Prepared Foods business units could face significant pressure.
“This is an unusual, perhaps unprecedented time for the protein industry,” said Noel White, president and CEO of Tyson Foods. “In my 39 years in the business, I’ve never seen an event that has the potential to change global protein production and consumption patterns as African swine fever does. The situation is fluid and fast-moving, but we’re working with others in the industry, government agencies and producers to prepare in the event ASF spreads to North America.
“A worldwide decrease in pork supply could put pressure on our Prepared Foods business by increasing raw material costs while offering significant upside to our Pork, Chicken and Beef businesses. The power of our diversified business model and broad product portfolio across more world geographies will be even more important under these circumstances.”
A challenge facing Tyson Foods and others is a lack of transparency from China about the extent of the outbreak. White estimated that between 150 million to 200 million hogs have died in China due to the outbreak.
“That correlates to about 10 million metric tons of product coming out of the marketplace,” he said. “From a total protein global supply, that’s something in the area of 5 percent. So, it’s an event that I have never seen happen before, that we are well positioned to deal with that in all three proteins.”
White added that he is seeing the market react to ASF.
“We have seen pork prices start to move in reaction to ASF, but hog prices have risen faster than what product prices have,” he said. “When product is in fact produced on a large scale for China, that product will come out of the US market, and prices are expected to escalate fairly rapidly.”
On a segment basis, second-quarter Beef operating income rose to $156 million from $92 million the year prior.
“Average price was up 2.3 percent, and volume increased 3.2 percent compared to the second quarter last year on improved cattle availability and strong demand,” White said. “The herd rebuilding continues, and we see ample cattle supplies into 2021.”
The chicken business unit’s operating income fell to $141 million from $231 million in 2018.
“Volume was up 26.2 percent, and average price was down 11 percent primarily attributable to the acquisition of the American Proteins rendering business last year that added considerable volume at relatively low prices,” White said. “In the second quarter, pricing began to improve as ASF news drove incremental demand for chicken. We are in a solid position to improve pricing as we talk to customers about contracts in 2019 and into 2020.”
Operating income for Prepared Foods spiked to $245 million from $119 million.
“Prepared Foods was up 16 percent in operating income and relatively flat on volume and average price when excluding the divestitures of several noncore businesses last year,” White said. “We expect our Prepared Foods input costs to increase in the third and fourth quarters as beef and pork prices rise on concerns of the African swine fever outbreak in China. Our plan is to recover these additional costs through pricing, but it will take some time.”
White added that Tyson Foods will be introducing alternative protein products this summer and early in the next fiscal year.
“We’re well positioned to capture growth in this space,” he said. “We have a deep understanding of how to develop new products, brands and categories, and our distribution reach will allow us to move quickly into the marketplace.”
Pork operating income rose to $100 million from $67 million.
“It is difficult to predict when ASF might positively impact our Pork business,” White said. “However, we believe any financial benefit will likely occur in late 2019 or later. We are well positioned to be agile and meet customer and consumer needs internationally and domestically.”