Source: MEATINGPLACE, 9/17/13

Turkey cutout margins in August turned positive for the first time since 2012 due to production cuts, improved demand and lower feed costs, while pork margins are getting a lift from strong exports, a Wall Street analyst said.

Turkey margins surged to their highest level in 17 months, returning to positive territory by the end of August from losses of about 10 to 15 cents a pound in July, BMO Capital Markets analyst Kenneth Zaslow said in a note to investors. The 11 percent improvement in August reflects aggressive production cuts that should continue to flow through the supply chain, further bolstering margins, he said.

In addition, turkey supplies could tighten due to a decline in weights that implies birds are being pulled forward for slaughter, Zaslow wrote in a note to clients. He predicted turkey production would drop 7 to 10 percent in the second half of 2013, based on indicators such as falling egg sets and poult placements. At the same, turkey export demand remains exceedingly strong, he said.

Pork
A rebound in export demand for pork has helped drive pork packer margins to their strongest level in nine months, and margins should remain robust, Zaslow said. Pork packer margins increased to $7 to $8 a head in August from $2 to $3 ahead in July and $3 to $4 a head last year.

The solid export demand, together with a drawdown of pork inventories in cold storage and high beef prices, should help pork prices remain more resilient than hogs, the analyst predicted. Hog prices are expected to continue to moderate as supplies and weights increase, he added.

Hormel to benefit
Hormel Foods stands to gain from the strengthening in turkey and pork margins in addition to its new product innovations and the Skippy acquisition, Zaslow said.

Tyson Foods should continue to exceed expectations on improved beef, pork and chicken fundamentals, he said.

For beef, that includes improved packer margins that, despite a recent pullback, will remain supported by reduced capacity, ample cattle supplies and strong export demand from Japan. In addition, beef packers recently reduced slaughter levels to manage elevated supplies.

In the chicken market, lower corn prices should cushion the impact of lower chicken prices, keeping margins strong, Zaslow said. Lower hatchability and layer productivity also will help offset chicken price declines, he said.

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