Rising Prices, Exports Have Meat Producers On A Roll

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Summer is the perfect time to throw a steak, hamburger or hot dog on the grill. But this year, rising prices for those treats threaten to sour the summer barbecue season.

Pork costs about 15% more at supermarket counters than it did a year ago. Beef is up 13% and rising. On the white meat side, the price of chicken is about flat.

The reason: drought scorched the Midwest for two years through the summer of 2013, limiting water supplies and killing feed crops. That forced ranchers to reduce herd sizes. Fewer cows and pigs meant higher prices.


"Consumers face record or near-record retail beef prices at the meat counter," the U.S. Department of Agriculture said in a June 18 report.

Still, meat sales are holding up well, and increases in beef and pork are moderating. Falling unemployment, low inflation, rising wages and a humming stock market have made consumers more willing to shell out for favorite meat cuts.

"When the year began, one of my worries was that sticker shock (for meat) would curb consumer demand. That hasn't happened," John Harrington, chief livestock analyst for market tracker DTN, told IBD.

1. Business

Boosted by high meat prices and strong exports, stocks gathered in the Food-Meat Products group ranked No. 1 Friday among the 197 industry groups tracked by IBD.

Tyson Foods ( TSN ) is the largest chicken, beef and pork producer in the U.S., with estimated 2014 sales of $35.4 billion. Globally, it's second to Brazil's JBS S.A., which acquired the U.S. meat producer Swift & Co. in 2007. In 2008, it bought the beef packaging operations of another leading U.S. brand, Smithfield Foods.

In addition, JBS reportedly owns 75% of the No. 2 U.S. chicken producer,Pilgrim's Pride ( PPC ). Mississippi-basedSanderson Farms ( SAFM ) holds the No. 3 slot.

Other large companies in the group includeHillshire Brands ( HSH ), which agreed on June 9 to be acquired by Tyson for $7.7 billion.Hormel Foods ( HRL ) produces pork, turkey and other food products.

Combined annual revenue for companies in the group is roughly $80.6 billion. JBS, which trades on the Sao Paulo exchange, reported $40 billion in 2013 revenue.

Demand for meat, especially chicken, remains high in the U.S. and exports of meat products are on the rise. Americans are switching from pork and beef to chicken, driving poultry production ahead of beef and pork.

In pork, as of June 1, the USDA said there were 62.1 million swine on U.S. farms, the lowest number since 2007. In addition to weak demand and drought, the 2014 herd was reduced by an outbreak of porcine epidemic diarrhea (PED), a virus that often kills piglets but rarely adults.

Longer term, U.S. per-capita consumption of beef fell a bit more than a third, from 85 pounds a year in the early 1970s to an estimated 53.5 pounds this year. The U.S. pork herd size fell about the same amount, according to DTN Senior Analyst Darin Newsom.

"At the same time, chickens have done the reverse, going from 50 pounds or less (of consumption) in the early '70s to about 83 pounds this year," Newsom said.

2. Market

The Agriculture Department in May raised its meat export forecast for fiscal year 2014, ending Sept. 30, by $600 million, to a record $32.2 billion. The top destination, China, is forecast to buy $20.7 billion of agricultural goods this year. Canada, Mexico and Japan are next in line.

"American farmers and ranchers are on track for another year of record exports, which builds on the past five years of the strongest agricultural trade in our history," Agriculture Secretary Tom Vilsak said in a May 29 statement.

Despite that demand, chicken production is also up, so "the strong chicken prices since March will level off," in the U.S., Sanderson Farms Chief Financial Officer Mike Cockrell said. "The peak for chicken demand is usually July 4th."

3. Climate

The meat processing industry is consolidating. Strong sales, high prices and the prospect of higher profits were driving forces behind Tyson's June 9 announcement that it would buy Hillshire Brands for $64 a share, or $7.7 billion.

Tyson, which has annual revenue north of $35 billion, beat out Pilgrim's Pride in a short, fierce bidding war for Hillshire, which sells Jimmy Dean sausages, Ball Park hot dogs and Sara Lee frozen pastries.

Pilgrim's Pride's parent JBS has spent $17 billion on acquisitions in the last decade, including Pilgrim's in 2009.

China's Shuanghui last September bought the remainder of Smithfield in a deal valued at $7.1 billion. Hormel has surfed the consolidation wave too. Its latest acquisition came on June 30, when Hormel agreed to buy privately-held CytoSport, maker of the "Muscle Milk" protein supplement and other nutrition products, for about $450 million.

Julie Craven, Hormel's vice president of corporate communications, told IBD via email, "CytoSport will serve as a growth catalyst for the Hormel Foods Specialty Foods segment, providing a branded franchise in the high-growth sports nutrition category."

4. Technology

"Feed efficiency has grown over the last decade," DTN's Harrington said. Genetically modified grains are helping to create more meat per animal.

That trend is also helping chicken producers like Sanderson Farms, where CFO Cockrell says 50% of the cost of meat production is feed grains.

In addition, he says, "now that the drought has moderated, and this year's (feed) crop is going into the ground, we are looking at lower costs in 2015."

Sanderson Farms is also using new technology to cut water use. "Rinses are now available to clean the product to keep pathogens at a lower level. That allows us to use less water," he said.

That's a big savings for Sanderson, which built the chicken industry's last five new processing plants, Cockrell said.

"Our newest plant will open in first quarter 2015 in Palestine, Texas. And we have made no secret of the fact we are interested in building one in North Carolina," he said.

In the beef industry, improved feeds and feed supplements have added 125 to 150 pounds per steer over the last 20 years, DTN's Harrington said. Today's steer at time of slaughter weighs between 1,250 to 1,400 pounds, a recent USDA report said. That weight increase has partly offset the decline in numbers in terms of revenue per pound.

5. Outlook:

Chicken is expected to continue to gain in popularity, with prices moderating as production continues to rise. But with American cattle herds dwindling while export demand rises, don't look for beef prices to come down anytime soon, analysts say.

Dairy producers, meanwhile, have managed to increase the size of the U.S. dairy herd and, as a result of improved feeds, milk production is up 18% in the last 10 years.

That's helped Denver-basedWhiteWave Foods (WWAV), in the related Food-Dairy Products group. WhiteWave sells milk and other products under Silk, International Delight, Land O' Lakes and other brands. Its share price has risen about 80% since its initial public offering in October 2012 at 17 per share. Its stock, which is on the IBD Leaderboard list of top-rated stocks, carries a near-best 98 IBD Composite Rating, meaning it has outperformed 98% of all stocks.

On the meat production side, producers always face a variety of potential risks. In an April report, research firm IBISWorld said those include "adverse weather conditions, disease outbreaks and competition from seafood, which the public increasingly views as a more healthful option," that separately or together "may limit future industry growth."

IBISWorld said consumers were still a bit hesitant to spend but that "meat processing is a fairly stable industry and demand is forecast to strengthen in the five years to 2019."

As far as higher meat prices, DTN's Harrington said producers raising prices have not yet seen a negative reaction from consumers.

"No one's blinked so far," he said. "I conclude that is a positive effect of more consumer confidence and more disposable income."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: TSN , PPC , SAFM , HSH , HRL

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