In Meat Wagon, we round up the latest outrages from the meat and livestock industries.
Update [2008-11-18 12:4:19 by Tom Philpott]: The credit-rating agency Fitch has come out with a presentation claiming that a Pilgrim’s Pride bankruptcy is “pretty inevitable” and would benefit its rivals (including Tyson), Reuters reports. PP’s bonds are trading at a 10 cents on the dollar — meaning investors are assuming it will soon slide into bankruptcy.
Something weird is happening in the meat industry, which is dominated [PDF] by a handful of large companies.
The weirdness involves Tyson Foods, which is the largest beef packer (at least for now), the second-largest pork packer, and the second-largest chicken producer.
In its latest quarterly report, the meat giant reported robust profits in its pork and beef lines, but a $91 million loss in chicken.
The economic conditions in the poultry business are tough: feed costs remain at high levels, while chicken prices at the retail level are low. In short, there’s too much chicken on the market.
Normally under such conditions, giants like Tyson merely cut production: produce less chicken, and thus boost its market price. And here’s the weird part: Tyson actually boosted chicken production in the latest quarter by 6 percent, thus worsening the problem. And the company has vowed not to cut chicken production going forward.
Why? Barclays Capital analyst Christopher Bledsoe thinks he has an answer: Tyson is intentionally taking losses in its chicken segment to “force other chicken processors to carry a disproportionate burden of this cycle’s necessary production cuts.”
Translated, I think he means to say that Tyson is trying to drive its largest poultry competitor, number-one chicken producer Pilgrim’s Pride, out of business.
You see, while Tyson can, at least partially, offset losses in its poultry business with pork and beef profits, Pilgrim’s Pride is a pure chicken company.
And for that reason, the tough economics of the chicken market, combined with the rigors of the credit crunch, have pushed Pilgrim’s Pride to the brink of extinction.
A year ago, Pilgrim shares fetched $30 on the stock market; today, they hover at around 30 cents — a near-total wipeout of the company’s value.
Pilgrim’s Pride leapt to the top of the chicken market a couple of years ago by snapping up competitor Gold Kist for $1 billion. Now, with high feed prices and low chicken prices pinching profits, the company is struggling to pay back the loan it took out for that purchase. And investors have no appetite to refinance the company’s debt.
Thus it is extremely vulnerable to ongoing trouble in the chicken market — and that is exactly what Tyson is creating with its policy of maintaining heightened levels of production.
If Pilgrim’s Pride collapses into bankruptcy, its assets will be available for fire-sale prices — and a company like Tyson could be poised to snap them up. At any rate, the fall of its largest competitor will give Tyson more leverage to dictate prices to both farmers and consumers.
Already, four companies — Pilgrim’s Pride, Tyson, Perdue, and Sanderson, in that order — own 58.5 percent of the poultry market. In antitrust theory, when four companies dominate more than 40 percent of a market, the big players wield enough market power to damage suppliers — in this case farmers. If Pilgrim’s Pride falls, the market will concentrate yet more — and the surviving players will wield yet more power.
However, Tyson is literally playing a game of chicken. Its own shares have fallen dramatically as investors weigh its puzzling chicken strategy; and credit-rating agency Moody’s just downgraded its bonds, citing trouble in the chicken market.
Meanwhile, the company is investing heavily in its operations in Brazil, India, and China, as I reported a few days ago.