Monday, November 12, 2007

Tyson Foods (TSN) Continues to Point to Food Inflation

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I have been loosely following the chicken/meat business due to Smithfield Foods (SFD) potential for massive increases in pork exports in the coming decade if a more substantial deal with China falls into place. However, what has held me back and kept my interest in the sector is the specter of inflation in their inputs to feed their animals. And it is also an interesting sector to watch due to the inflation they are passing along to the consumer. If you are newer to the blog I wrote a few entries about this back in September, so click on the labels at the bottom of the entry for more.

But for now Tyson Foods (TSN) reported earnings and despite a big push into (where else) Brazil and China as their quality of food improves (I keep going back to that theme), we have a lot of inflation throughout their business chain.

  • Tyson Foods is buckling under the pressure of rising commodity costs. On Monday, the meat processor swung to a profit in the fourth quarter, thanks to drastic cost controls, but issued a dismal forecast for 2008. Tyson now predicts that it will net 30 to 70 cents a share next year, a range that was far below the Street's call. Analysts hoped for a forecast of $1.05 a share.
  • Food producers have been hit hard by rising corn and grain prices for multiple quarters. The boom in alternative energy and growing demand for U.S. food items abroad, has tightened supply and boosted prices. The rise in commodities has made it more expensive to feed livestock, which in turn, increases the cost of meat. Thus, companies that process meat, such as Tyson, have felt pressure on their profit margins.
  • To offset these challenges, Tyson has dramatically cut operational costs and raised prices on its products. Over the fiscal year, the company saved $265 million, from cost controls, layoffs, and plant closings.
  • In the fourth quarter, Tyson also increased average chicken prices by 12.0%, beef prices by 8.6% and prepared food by 2.3%. While the tactic worked well in the first and second quarters (See: "Tyson Gains By Sharing The Pain." ), with Tyson exceeding Wall Street expectations, the price hikes have continued to dampen consumer appetite. In the fourth quarter, the volume of chicken sales slipped 3.3%, beef dropped 0.3%, and prepared foods dropped 8.0%.
This is almost a carbon copy of the situation last quarter, except the company if going to run out of low hanging fruit to save costs. So I can only see the pricing issues getting worse for the consumer. Keep in mind the government tells us this is all a figment of our imagination. In their reporting when something gets too expensive, they switch to the next cheapest item and say consumers will substitute - therefore the consumer feels no inflation... i.e. steak too expensive? Well we will ignore steak prices and substitute hamburger for steak and since hamburger is cheaper than steak, prices actually went down. I am generalizing but this is the general methodology. Therefore until we move down to Starkist tuna fish I suppose we could keep saying inflation in food is just in our imagination.

So you are seeing 2 things... many quarters in a row of persistent inflation and I am not talking 1.9% increases, and consumer destruction from higher prices. Things like this is why I say for many companies 2008 estimates are still way too high - profit margins do get squeezed by inflation. And if they are not, the consumer has to pay more to keep margins flat - and the more the consumer pays the less he/she buys. Its a non virtuous cycle - and short of worldwide recession I don't see these trends reversing anytime soon. Again, we live in a world of shortages and it's only going to get worse (with ebbs and valleys of course) as we progress through the next few decades.

On the plus side, it's good for agriculture stocks although you can't tell today. ;)

Long inflation

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