Tyson Plays Chicken With Supply

Tyson Foods plucked a fiscal first-quarter profit, thanks to a turnaround in the chicken market.

Springdale, Ark.-based Tyson Foods said early Friday that its chicken unit continued to rebound as volume and average selling prices for poultry improved from year-ago levels.

After facing a slowdown in consumer spending, the meat-producing industry is improving on easing input costs and production cuts, which help lift prices. Tyson Foods Chief Executive Donald Smith said the amount of chicken, pork and beef on the market has declined since 2008, a trend that is expected to continue in 2010. He pointed out that the last two-year decline in protein availability in the U.S. was more than 40 years ago.

On the flip side, export demand for beef and pork improved since last year and “decreased total supply should be favorable for pricing,” the CEO said. “We're poised to take advantage of the market opportunities, and we're better positioned to deal with changing market conditions."

In its first fiscal quarter of 2010, Tyson earned $159 million, or 42 cents per share, well ahead of analysts’ consensus call for a profit of $72 million, or 18 cents per share, according to Thomson Reuters. The figures represent a significant improvement over year-earlier losses of $104 million, or 27 cents loss per share, when feed and fuel costs pressured the meat producer’s bottom line.

Like other food players Tyson’s profit margins were squeezed in 2008 due to soaring grain and corn prices, leading to riots in some countries, rice and flour smuggling in others. Rising gasoline prices, an emerging credit crisis and economic recession also tightened consumer wallets, putting pressure on the food-producing industry. (See “U.S. Food Prices Pork Out.”)

As commodity costs ease, lower crop prices mean good news for meat producers since grain and oil seeds are key animal feed ingredients. The USDA has said that lower corn prices will support increased broiler meat production. This trend has benefited companies such as Tyson, rivals Pilgrim’s Pride and Hormel Foods .

Other direct beneficiaries of lower commodity prices include food producers such as Kellogg , ConAgra and General Mills , which previously imposed price increases to offset higher commodity costs. Costs were then passed on to consumers who have been eating more meals at home to save money. (See “No Snap, Crackle and Pop For Kellogg.”)

Shares of Tyson surged 5.1% to trade at $14.70 in afternoon activity, while Pilgrim’s Pride added 3.7% to $9.22 and Hormel edged up .3% to $38.93.

Tyson said chicken pricing was up 2.8% in the quarter, while volume rose 5.6%, attributed to acquisitions. Others meat producers, including Pilgrim's Pride, which filed for Chapter 11 bankruptcy protection in 2008 because of high grain prices and a heavy debt load, have been trimming production to weather the economic downturn. (See "Pilgrim's Pride Flies For Cover.")

Prices for beef and pork both fell 6.1%, but beef volume did improve 7.2%. Demand for pricier proteins has fallen as penny-pinched consumers trim their food budgets amid economic recession.

Tyson forecast improved seasonal demand and pricing for its chicken further into fiscal 2010. The company expects little change in its beef business. It also warned of a negative impact from higher raw material costs in the current quarter.