Wednesday, September 5, 2007

Tyson Foods (TSN) warns

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I don't know when I suddenly became a beef/poultry analyst - until a month ago I never looked at these names, but they are interesting now for various reasons, especially the inflation angle and potential for exports into developing nations as those countries develop wealth and demand better food. Previous comments on both these topics can be found here.

Tyson Foods (TSN) results/guidance today leads us to the troubling question - what happens when you cannot pass on raw input costs to the consumer.... ? What happens to corporate profits? Well you get a Tyson Foods result.

Tyson Lowers 2007 Profit Forecast, Citing 4Q Costs, South Korean Beef Disruption SPRINGDALE, Ark. (AP) -- Tyson Foods Inc., the world's largest meat processor, lowered its profit forecast Wednesday for this fiscal year, citing rising costs and disruption of beef exports to South Korea.

"The fourth quarter is turning out to be more challenging than expected," said Tyson President and Chief Executive Officer Richard L. Bond. "Our beef business has been affected by higher than expected live cattle costs and a decline in beef revenues due to a disruption in South Korean beef trade."

"In chicken, we successfully implemented price increases earlier in the year, but gave up some sales volume as a result," Bond said.

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So what are some takeaways? First, while they were able to pass along the increased costs in chicken to consumers, it did affect sales. While 'eating' is inelastic; what you eat is elastic - you can move to cheaper foods (not happily) - but I think this is what is happening for the lower and increasingly, middle class consumer. If you are making $140K a year you don't really care much about this, but if you are making $55K all these added costs of life, to go along with your measly 3% annual wage hikes start to add up (but wait, the government tells us CPI is 2%, nevermind, not a problem - if only the grocery store would listen to the gov't CPI statistics!)

Second, inputs for feeding these animals, which we've discussed in earlier blog entries, are just skyrocketing... and when you cannot pass this all on to consumers, your profit margins get squeezed. Just like with housing, we have the parallel - the consumer can only take so much increase before they cut back severely due to wages not increasing at the rate of these goods. If one now buys beef 6x a month instead of 8x, or people on the lower end stop almost completely - that all adds up.

This grandiose push to ethanol is a classic case of unintended consequences. We are all paying for it at the grocery checkout aisle.

Why should you care? These are all incremental negatives to the retail class - when the house ATM was open these things could just be explained away - short on cash? cards maxxed out? Pull $10k out of the house to pay for that gas, energy, grocery,tuition, medical bill! No problemo. Now? Problemo.

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