Food Companies Prepared To Pass The Buck

By Eric Fox | August 04, 2008 AAA

Earnings reports from Tyson Foods (NYSE:TSN) and other food companies demonstrate the continuing impact of rising feed and other input costs on operations. This trend is expected to continue as rising commodity and food costs work their way into the supply chain, forcing consumers to pay more.

Tyson's Earnings Chicken Feed
Tyson Foods reported fiscal third-quarter 2008 diluted EPS of 3 cents per share and sales of $6.8 billion. Earnings were down significantly from last year's fiscal third-quarter earnings of 31 cents per diluted share. While it is no secret that earnings at Tyson and many of its competitors are being hurt by rising feed costs, the impact was greater than expected, and the results missed analyst EPS estimates of 12 cents per share and $7 billion in revenue.

The weakness in earnings was due to Tyson's chicken division, which the company said experienced "more difficult market dynamics". The beef, pork and prepared foods segments were all profitable in the quarter, while the chicken division showed a $44 million operating loss.

Management said grain costs in the chicken division were up $140 million over the third quarter of 2007. Also energy, natural gas, cooking ingredients and freight were up an additional $60 million over last year. The company predicted that they would increase approximately $550 million for fiscal 2008.

Tyson Foods and other food producers want to pass these costs on to customers. Management said during the conference call, "Our efforts to increase prices will continue over the next several quarters". Despite efforts to pass along food costs, the fourth quarter will also be unprofitable for the chicken segment, and management indicated the loss would be greater than in the third quarter.

Tyson also blamed the ethanol blending mandates, hedge funds and speculators for driving the price up. "You also have the index and the hedge fund situation like in energy, you have the same situation in commodities where there is a huge amount of increased activity in investing if you will, or speculating if you will, in the commodities markets and I think both ethanol and the index/hedge funds have increased the grain prices significantly." (For more about this industry, check out Learn To Corral The Meat Markets.)

Industry-Wide Epidemic

  • Maple Leaf Foods (TSE:MFI), one of Canada's largest food producers, is having similar problems with rising feed and fuel costs. Maple Leaf Foods reported an adjusted loss of C$0.01 per share from continuing operations. The company said that higher grain and fuel costs outpaced price increases and that the company would increase prices to manage rising costs.

  • Pilgrim's Pride (NYSE:PPC) reported an operating loss of $48.3 million, or 69 cents per share, in its fiscal third quarter. Clint Rivers, president and chief executive officer, cited "significant headwinds facing our company and industry from high feed costs". Pilgrim has indicated that it passed on some of the record-high corn and soybean meal costs, but could not keep up with the extreme volatility in the grain markets. The company said that total feed costs in the quarter climbed $266 million, or 41%, over the same quarter last year, and total feed costs for fiscal 2008 would be up an estimated $900 million from last fiscal year.

  • Smithfield Foods (NYSE:SFD) doesn't report earnings until mid August, but is expected to show similar effects of rising input costs. In its fourth fiscal quarter reported in June, Smithfield Foods cited "record high grain prices" in its Hog Production segment, and that it continues to be very concerned about ever-increasing grain costs.

Bottom Line
Food companies have struggled over the last year with rising raw material costs, and have passed some of these higher costs down to consumers. This may accelerate in the future, as Tyson Foods, Pilgrim's Pride and others cannot continue to absorb higher costs indefinitely.

To find out how cost of goods sold affects companies, read The Bottom Line On Margins.

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