SPRINGDALE, Ark. – Executives with Tyson Foods often cite the company’s focus on beef, chicken and pork as the key to its success, but as the effects of last year’s drought on the beef and pork complexes becomes more apparent, it is clear they see greater promise in the company’s chicken business.

“We are finding that food bought on value menus has been declining now for two years,” said Donnie Smith, president and chief executive officer, in a conference call with financial analysts on Feb. 1 to discuss the company’s first-quarter financial results. “Instead, operators have been attracting patrons with new products and promotions by adding servings of breakfast sandwiches, chicken nuggets, tacos, fried chicken, sandwiches and wraps. At the same time, servings of burgers, seafood, pizza, soup and pasta have declined. Our diverse portfolio and increased flexibility give us the opportunity to take advantage of these types of swings in consumption.”

With regard to the strength of chicken in the market, Smith cited several data points he believes indicate chicken consumption is on the rise. For example, he said in the past 26 weeks, fresh chicken pounds are up 2.8 percent and dollar sales are up 8.5 percent. If the timeframe is tightened to a 13-week view, fresh chicken pounds are up 2.7 percent and dollar sales are up 9.2 percent.

“Now, if you go to the last four weeks, fresh chicken pounds, and this would be sold at retail, is up 4.3 percent and dollar sales are up 10.6 percent,” he said. “So what we’re beginning to think, and it will take a little bit more time to flesh this out and see if we’re right, but what we’re beginning to think is that with all of these pressures on consumers today, maybe we are now seeing a legitimate shift from red meat proteins into chicken.”

Jim Lochner, chief operating officer, added that the price spreads between chicken, beef and pork are starting to be felt and noticed by consumers.

“So, if beef continues, which it is likely to increase and inflate the price with decreased supply and probably the influence of exports, we will start to see the consumer probably continue to have some more interest in chicken,” he said.

But Tyson Foods’ chicken business is not immune to rising feed input prices. The company estimates the cost of feed for its chicken unit will increase $600 million in fiscal 2013 when compared to fiscal 2012.
“The capital investments and operational improvements we made in the chicken business, coupled with changes in our mix and pricing, have put us in a position to better handle rising feed costs, while maintaining our expected levels of profitability,” Smith said.

He added that the company expects “grain futures” to trade in the range of $7 to $7.50.

“You may have some temporary moves a little bit below that or a little bit above that,” he said. “As we move closer to the low end of that range, we add to our position.

“And then as we get up into the upper part of that range, we grind our coverage. And so, we would continue to do that going into the spring. I think we’re all looking for big plantings. As we get closer to the end of March that’s probably going to have some psychological effect on the market. But from there on out it is going to be weather.”

Tyson Foods also has reduced the number of annual fixed-priced contracts it is exposed to.

“It has been very important to us to continue to work down how many annual fixed price agreements we have, and as of now, coming into calendar 2013, we're at 9 percent, which is, if you will remember, dramatically less than where we were, say, four years ago,” Smith said. “We have also seen an increase in the amount of product that is sold where pricing is tied to some part of the input cost.”

Looking at food service demand expectations for 2013, Smith said the consensus is food service will be flat or up 1 percent, primarily driven by population growth.

“With consumers burdened by sluggish job growth, the prospect of rising food costs, the loss of the payroll tax cut, and uneasiness about the future, forecasts could have been much worse,” he said.