080301 Packer Consolidation Not A Cure-All

Arkansas Morning News - Wall Street analysts happy with the pending consolidation in the global beef processing industry might want to wipe the smiles off their faces.

On Tuesday, Brazilian beef company JBS S.A. announced a $1.27 billion deal to acquire Kansas City, Mo.-based National Beef Packing Co., the beef division of Smithfield, Va.-based Smithfield Foods and Tasman Group, an Australian-based beef company.

Several analysts, including Stephens Inc. market watcher Farha Aslam, said the pending deal would bring much needed consolidation to the beef industry. U.S. beef packers lost more than $500 million in 2007 because of excess slaughter capacity

"The increased industry consolidation will likely foster increased production discipline among beef packers, which would improve beef-packing margins," Aslam wrote in a client note.

Shares of Springdale-based Tyson Foods Inc. are up more than 13% in value from Monday's opening price to Thursday's closing price. The trading volume also spiked from an average of about 3 million shares traded daily to more than 7.4 million traded on Wednesday. The trading volume - an indication of interest -settled Thursday to a little more than 5 million shares.

But not all beef market watchers believe the JBS moves will do much to erase existing and future losses in the industry.

"This consolidation will not reduce overall slaughter capacity by one (cow) head. JBS did not buy these companies to close them. That was evident when the company acquired Greeley, Colo.-based Swift & Co. last year and added an extra shift," said Steve Kay, publisher of Cattle Buyers Weekly. "If investors think this consolidation will make it easier to make money in the business, they had better think again."

There are still too many processing plants and not enough cattle to go around. When that is added to a lack of exports and soft domestic demand for beef products, the result is weaker capacity utilization and financial losses for beef packers, Kay said.

As the largest beef packer in 2007, Tyson Foods incurred about $210 million in added processing costs due to excess capacity, Kay said.

Tyson Foods ran its beef plants at roughly 75% of capacity in the last quarter, posting a beef segment operating loss of $83.8 million in the three months ending Dec. 29.

Tyson Foods CEO Dick Bond has estimated excess slaughter capacity to be between 10,000 and 14,000 head per day. Bond said the U.S. cattle herd is not increasing. He predicted the cattle herd has likely peaked for all time because of higher grain and energy costs.

"It's premature for us to speculate how these transactions will affect our industry or beef production capacity," Tyson Foods spokesman Gary Mickelson said in an e-mail.

Travis Justice of the Arkansas Beef Council, said while JBS might not plan to downsize operations, prolonged weaker margins could dictate more plant closings as seen recently with Tyson Foods , who in February closed its Emporia, Kan., beef slaughter facility.

The buying spree by JBS did knock Tyson Foods from its No. 1 rank on the world beef stage.

If approved by federal regulators, the deals will raise the JBS beef slaughter capacity to 79,200 head per day, more than twice that of Cargill and Tyson Foods, Kay said.

Mickelson said the JBS transactions will result in a change in beef market share, but noted that Tyson Foods' combined chicken, beef and pork businesses still make it the nation's largest meat processor.

Kay said it is doubtful the consolidations will face much regulatory scrutiny. He said the mere reduction of names in the business does not address the serious overcapacity problems.

The proposed consolidation puts more domestic pressure on both Tyson Foods and Cargill operations as they will still be vying for cattle and export market share against JBS and its global advantage, said Jim Robb, director of the Livestock Marketing Information Center in Greeley, Colo.

The global market share has shifted, with JBS getting 30.2% of the total kill capacity, Cargill 20.6% and Tyson Foods 20.4%, according to Kay.

"I think it's a wait and see situation as to how the JBS purchases will effect the local cattle industry," said Tom Troxel, beef specialist with the University of Arkansas Cooperative in Little Rock.

He said JBS appears to have deep pockets and strong international ties which could help open more beef export markets to the U.S. Troxel said open markets would certainly help local cattle ranchers and Tyson Foods.

Who Has The Beef

Tyson Fresh Meats JBS-Swift & Co. After Consolidation.

$12.7 billion: beef sales in 2007 $20 billion: beef sales in 2007

8: U.S. beef packing plants 12: U.S. beef packing plants

1: Canadian beef operation 1: Australian beef operation

1: Argentine beef operation 6: Argentine beef operations

28,700: daily beef slaughter capacity 23 Brazilian beef operations

79,200 daily beef slaughter capacity.

Source: Cattle Buyers Weekly and respective companies.

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