060115 Tough Beef Market Cuts Meat Cos' Earnings

Kansas City, MO - As U.S. meat companies begin to release earnings reports, stock market analysts are lowering their earnings estimates to reflect reduced expectations for beef profitability.

Leonard Teitelbaum, research analyst for Merrill Lynch, said in an emailed comment that his firm was lowering its fiscal first quarter 2006, which ended Dec. 31,earnings-per-share estimate for Tyson Foods (TSN) "to $0.12 from $0.23, primarily due to our reduced expectations for profitability in the beef segment."

Tyson Foods is the world's largest meat processor and the second largest food company in the Fortune 500.

Additionally, Merrill Lynch trimmed its profitability estimates in Tyson's poultry division because of reduced export expectations. In an interview, Teitelbaum linked the decline to bird flu fears.

Gary Mickelson, spokesman for Tyson Foods, said he couldn't comment on Teitelbaum's prediction in the period leading up to the company's earnings report. Tyson's earnings are to be released Jan. 30.

"It's not just Tyson" that's being affected by beef's problems, Teitelbaum said. He pointed to Swift & Company's (SWT.Xx) latest earnings statement that said the world's second-largest processor of fresh beef and pork products reported sales of $2.33 billion in its fiscal second-quarter, ended Nov. 27, down 6% from the same quarter a year earlier.

Swift's report said net sales had declined in all three of its business segments, and that price gains in Australia and its beef segment and a volume increase in its pork division were more than offset by volume declines in Australia and its beef division along with lower prices for pork.

Teitelbaum said the problem is that packers are forced to pay high prices for slaughter-ready cattle, but they are limited in what they can squeeze out of beef buyers.

"The spread between cattle costs and beef prices is too great," he said.

For the week ended Jan. 13, HedgersEdge.com estimated beef packer losses at $39.03 per head. For the same week, the U.S. Department of Agriculture estimated slaughter at 606,000 head.

Small openings in the Asian export market over the last month haven't altered analyst estimates of the near-term outlook. Diane Geissler, also a Merrill Lynch research analyst, said she expected the U.S. to regain its beef export markets eventually, but not before meat company earnings show more strain from lost markets.

The U.S. lost its beef export markets in December 2003 when the first case of bovine spongiform encephalopathy, or mad-cow disease, was discovered in an imported cow in Washington state. A few smaller export markets have come back on a limited basis since then, but it wasn't until Dec. 12 that the U.S. and its largest beef export market, Japan, were able to come to some terms for partial resumption of trade.

South Korea followed, but in all cases there are age and other restrictions that apply. Market analysts don't expect normalized trade to resume any time soon, especially in Japan.

Gregg Doud, an economist with the National Cattlemen's Beef Association, said the U.S. would try to open the door to South Korean beef markets a bit more in coming days. He expected a push toward a free- trade agreement that would do more than just reopen the market to U.S. beef but would lower the current 30% duty on beef to zero in a few years.

That would be "a significant piece of leverage over other countries" in terms of U.S. beef competitiveness in Korean markets, Doud said.

Beef values have diminished over the last two years because of those lost export markets, Geissler said. This is especially true of items like tongues, livers, kidneys or hearts, which don't sell well in the U.S. but have a much higher value in many other countries.

Besides stringent age restrictions placed on U.S. beef for the Japanese market, U.S. meat companies face lingering Japanese consumer fears about the safety of U.S. beef, industry market analysts say.

A Kyodo News Agency survey in December showed about 75% of Japanese respondents were unwilling to eat U.S. beef because of BSE fears. And a Jan. 13 Kyodo News story said the amount of U.S. beef imported into Japan in the first month after the two-year ban was eased was less than 4% of pre-ban imports.

Teitelbaum said the void in Japanese markets was filled with Australian beef during U.S. beef's two-year absence, and beef producers there "won't give it up readily."

Meanwhile, the price of poultry in international markets held up well until about six weeks ago, when it began a 30%-50% slide, Teitelbaum said. He and Geisslerattributed the drop to declining poultry consumption in Europe because of bird flu fears and increased shipments from Brazil over the period.

Toby Moore, vice president of communications for the USA Poultry & Egg Export Council, said wholesale chicken leg quarter prices were down and industry officials are blaming lowered export business and "a fairly large supply on the market."

Countries like Romania are thinking of banning all chicken imports, including that of the U.S., even though the U.S. doesn't have the deadly and highly pathogenic H5N1 strain of avian influenza, Moore said.

Turkey, while not a buyer of U.S. chicken, is a transshipping point, and could ban even through- shipments of product, Moore said. Ukraine keeps trying to ban all imports either to protect against bird flu or to protect its own production in the face of declining consumption due to flu fears.

An interesting point for Moore was that anecdotal evidence shows that exports to areas where bird flu is a more serious problem, like Asia and Russia, aren't down. Some consumers may be wary of locally produced poultry, but those that buy and eat imported product apparently aren't deterred.

Source: Dow Jones

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