Tyson Foods CEO Donnie Smith said during the company’s third quarter earnings call that continued improvement in operational efficiency won’t, by itself, be enough to capture needed margins in the chicken business. A greater focus on product pricing and getting paid for value creation, he said, is a key to future profitability.
The challenge in achieving margins in the chicken business is reflected by the fact that Tyson posted fiscal third quarter earnings for its beef and pork segments near the top of their normalized ranges, while earnings in the company’s chicken business slipped. The chicken business is caught in a squeeze created by industry overproduction and historically high corn prices.
Tyson’s third-quarter chicken operating income was a meager $28 million, or 1.0% of sales, down from $186 million, or 7.4% of sales, a year ago. What’s worse, the company’s chicken segment will likely experience a loss for the fiscal fourth quarter of 2011.
By comparison, Tyson’s beef operating income was $140 million, or 4.0% of sales, and pork operating income was $124 million, or 8.8% of sales. The company, in fact, just raised the normalized profitability range for its pork business to 6% to 8%.
The performance of the Tyson chicken segment has some stock analysts fuming, and led one to ask the “existential chicken question” in the company’s third quarter earnings call: Why does the industry continue overproducing?
Never mind that Tyson is outperforming the majority of its U.S. chicken industry competitors – and managed a profit in the chicken segment in the current quarter when many companies are losing a nickel on every pound produced. Tyson, in fact, has generated almost $800 million in operating efficiencies in its chicken business since 2008 in its push to deliver profits.
Now new worries have emerged about corn costs. While the U.S. chicken industry appears to be moving toward production cuts of between 5% and 6% later this year, USDA’s latest projections point to even higher corn prices. The World Agricultural Supply and Demand estimates released on August 11 forecast 2011/12 corn production at 556 million bushels lower than the previous crop due to a reduction in harvested area and lower expected yields.
Pricing takes on added importance
In Tyson’s August 8 earnings call, Smith said the company would be working to offset higher grain costs with improved operational efficiencies in 2012. That hurdle now appears even higher given USDA’s projection for lower corn supplies. More than increased operational efficiency is needed, he indicated.
“We believe we are adjusting to a new paradigm where for a prolonged period we will be required to get chicken pricing to a level to cover live production costs in the upper 40-cent per pound range,” Smith said in the August 8 earnings call. By comparison, live production costs averaged in the mid 30-cent range in recent years and in the mid 20-cent range in the prior two decades. “We believe the current input costs are here to stay. Therefore, we are focused on pricing, because the current situation is simply not sustainable.
“We will get revenue up on top of the cost structure,” he said, “but we are going to have to focus our business on getting paid for the value we create for our customers.”