Shares of Smithfield Foods, Inc., and Tyson Foods, Inc., tumbled today after analyst Heather Jones cut her profit outlooks for the country’s two largest meatpackers, citing soaring feed costs and concern consumers may balk at pricier beef and pork.
While Smithfield and Tyson have some grain supplies hedged at prices lower than current market levels, both would still be exposed to higher costs if corn rallies further, Jones said in reports today.
“We do not anticipated any near-term abatement” in surging feed costs, said Jones, who follows grain and meat processors for BB&T Capital Markets. Feed costs “are expected to be up dramatically” compared with last year, she said. Jones lowered her ratings on both Smithfield and Tyson shares to “hold” from “buy.”
Margins across the U.S. beef and pork industries came under increasing pressure in recent months after corn climbed above $6 a bushel following a disappointing harvest. Corn futures in Chicago touched a 30-month high at $6.66 ¼ a bushel Jan. 19 and are up more than 60 percent from year-ago levels.
In today’s trading, March corn futures fell 2 cents to $6.55 ¼ a bushel.
Corn costs for the nation’s livestock feeders are expected to total about $27.6 billion this year, up 52 percent from last year, according to U.S. Department of Agriculture data.
Tyson’s costs have also increased because tight cattle supplies have led to record prices for slaughter-ready steers. While Tyson and other meat companies have been able to pass along higher prices to buyers, it remains to be seen whether they can continue to do that this year as high unemployment keeps consumer spending in check, Jones said.
“Beef prices must move meaningfully higher to generate margins akin to those enjoyed in 2010,” Jones said in a report on Tyson.
“Given tight cattle supply, still-strong export demand and some improvement in higher-end foodservice demand domestically, prices likely will move higher,” Jones said. However, she’s “cautious” whether beef prices will increase enough “to fully offset the rise in fed cattle prices, and (on) what effect that will have on domestic demand.”
Jones lowered her profit estimate for Tyson’s fiscal 2011 to $1.55 a share from $1.64 in a previous forecast. Tyson earned $2.20 a share in its fiscal 2010.
Smithfield has passed higher pork prices to foodservice customers, though those customers have been slow to raise their prices in turn due to worries over the U.S. consumer, Jones said. Retailers have also been reluctant to fully pass on higher wholesale pork costs.
The management of the Smithfield, Va.-based company believes rising costs will ultimately be passed on to the consumer, who will eventually adjust to higher prices, Jones said. Still, “we harbor some concern regarding the potential impact on demand when the end-consumer begins to fully bear the higher cost,” Jones wrote.
Further price increases are likely “given that surging feed costs will likely drive further herd liquidation,” she said.
Smithfield is expected to earn $1.80 a share in its fiscal 2012, down from $2.20 in a previous estimate, Jones said. For Smithfield’s fiscal 2011, which began in May, Jones estimates the company will earn $2.73.
In afternoon trading today, shares of Springdale, Ark.-based Tyson fell 27 cents, or 1.6 percent, to $16.98. The stock rose 40 percent last year. Smithfield shares fell 55 cents, or 2.7 percent, to $20.17. Smithfield stock rose 36 percent in 2010.