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Fitch sees poor processor margins and price-weary consumers
Story Date: 2/29/2012
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Source: Rita Jane Gabbett, MEATINGPLACE, 2/28/12
Fitch Ratings has taken note of declining beef and pork processing margins and warns that passing on the higher prices processors are paying for livestock to consumers is going to become less feasible going forward.
In a research report titled “Protein update: Meat Processors Feel Pressure,” the rating agency noted that large red meat processor realized double-digit pricing and mix benefits with minimal effect on sales volumes since mid-2010. It attributed this to the industry’s ability to pin price increases to widespread food cost inflation and the fact that protein is core to consumers’ diets.
“Fitch does not expect double-digit pricing to continue given the slow economic recovery and customers’ ability to switch to lower cost chicken products,” the agency warned, even though consumers have so far absorbed meaningful increases in red meat prices with few switching to chicken.
The agency does not, however, see weak red meat processing margins, in isolation, as having a near-term negative credit rating impact, saying, “varying levels of operating efficiency and differences in product mix should mitigate earnings pressure.”
Beef
Concerns about excess capacity, competitive factors and consolidation have surfaced since beef industry margins turned negative. However, Fitch does not expect further industry consolidation because of potential antitrust complications.
“A short-term response to losses in the industry is to reduce beef supply or production,” the report said, noting processors are reducing slaughter rates in response to negative margins. “Plant closures similar to ones completed by Tyson over the past few years are also viewed as possible,” the report predicted.
Pork
While pork-processing margins declined materially in early 2012, margins have since recovered and remained positive. Pork margins are historically higher and less volatile than beef, Fitch noted.
“As with beef, the pork industry enjoyed robust pricing with minimal declines in volume since mid-2010, but Fitch does not expect this level of pricing power to continue,” the report concluded.
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