Chicago - The worst may be over for U.S. meat companies whose stocks have fallen sharply this year amid ample supply and slow export demand.
However, analysts caution there may be a few glitches which could stall any stock rebound, namely continued slack export demand from cash-strapped regions like Southeast Asia and Russia.
"We believe that prospects are looking up for the meat sector, particularly against last year's poor performance," David Nelson, an analyst at Credit Suisse First Boston, said in a research note.
Nelson last week raised his rating on IBP Inc., the world's largest processor of fresh beef and pork, to buy from hold, saying the outlook for beef packing margins has improved because of capacity cutbacks.
Meat supplies have been exceptionally high this year, due largely to a drop in export demand from Southeast Asia. A summer drought in Texas, a major beef producing state, also forced many producers to put cattle to market sooner than they traditionally would.
"We're still bumping up against some pretty good beef supplies," said George Dahlman, an analyst at Piper Jaffray.
But Agriculture Department figures suggest that trend is turning. USDA last month predicted beef production would decline 7 to 9% in 1999, with some of the sharpest declines occurring next summer.
USDA proposed that this year will mark a dramatic change from near record beef supplies from herd liquidation and record slaughter weights. In its place will be sharply curtailed feeder cattle supplies, large declines in beef production, and loss in market share in 1999.
Even if supplies contract, Dahlman said export demand will be the key to improving meat prices.
"We may have diminishing supplies but we may not have the demand to push prices up," he said. "If we can see a relatively small contraction in supplies and start seeing demand somewhere other than the U.S. start to perk up, we could swing prices pretty quickly."
Patrick Schumann, an analyst at Edward Jones, said industry watchers may have underestimated the severity of the beef and pork downturn in 1998, but conditions look more promising in the coming months.
"Now that most of that is behind us and the projection is for supplies to come down a bit, that gives us reason to be optimistic over the next few quarters," Schumann said.
"It looks like the worst is probably over, and now we start down the long road of recovery," he said.
But if demand from Southeast Asia deteriorates further, "it could throw a wrench into recovery plans," he said.
Meat Industry Insights News Service
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Phone: 631-757-4010
Fax: 631-757-4060
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