Allendale has become one of the main sources, if not the source, for hedge funds to ask questions about their commodity investments. Wall Street's insatiable interest in commodities means in the past three years we have consulted on everything from commodity companies (John Deere, Bunge, Smithfield, Swift, etc.) to direct investments in futures or through some type of index product. With that in mind one of the companies we monitor and make projections for is Tyson Foods, the nation's largest meat company. They are involved in chicken production processing, hog production/processing, and cattle processing.
Tyson Chicken: Results for the largest chicken producer/processor indicated the worst numbers in company history. Profits in chicken production and processing are determined mainly by chicken production (chicken prices and grain prices). The dramatic rise in grain costs and minimal chicken price increase meant a $61 million loss for the chicken segment. Our projections for grain and chicken prices indicate these solid losses will continue through the their quarter before getting to breakeven by the fourth quarter. We are assuming chicken production, as a whole will need to dip down to 5% to 8% lower in order to see profitability return. The latest egg set data posted shows they are running 2% lower now.
Tyson Pork: Tyson is the nation's 11th largest in hog production and the 2nd largest pork processor. Their pork segment profits come more from pork processing than hog production. Therefore, the massive profits from pork processing far outweigh the losses in the hog production area. Big supplies mean fantastic capacity utilization (lower fixed cost per hog) for packers. They also usually mean a better processing margin as live hog prices generally fall more than pork prices. In tight supply years, pork processors get hit the opposite way. The net result is a $63 million profit for the pork segment. This is second only to the previous quarter of $76 million. Big profits will continue through 2008 for pork processors. Losses will remain in hog production through 2008.
Tyson Beef: When Swift purchases National Beef and Smithfield's beef segment, Swift will be the number one beef processor. Now that Tyson has dropped the Emporia Kansas plant off the slaughter schedule it drops to third place after Cargill's Excel unit. In the first quarter their beef segment saw losses of $11 million in beef processing. That is compared with the $85 million loss the previous quarter. They should post a moderate profit in second quarter numbers as the beef/cattle spread has improved and we expect a good deal more cattle to show up at their front door. They also hope renewed South Korean exports in mid May will improve the picture. We do not look for beef processors to make any consistent money after summer however, as live cattle supplies dry up.
The Tyson Message: Tyson estimated grain costs should increase by $600 million for fiscal year 2008, which ends in September. Not only will that cramp livestock feeding profits, but keep in mind the tightest corn numbers will come with the 2008 crop, which is fed through most of 2009.
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