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Tyson Foods shares tumble, as cattle costs hurt profits

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Tyson Foods cut its profits forecast, citing weakened margins in its beef division, where profitability looks set to remain below average next year too, although it forecast a continuation of strong results in chicken.

Shares in the US meat giant tumbled by 9.5% to $40.16 in morning deals in New York, wiping some $1.8bn off it stockmarket value.

The group said that "unless beef market conditions improve rapidly", it expected its underlying earnings for the year to September to fall below the $3.30-3.40 per share that it had previously guided too.

"As a result, we are modifying our… guidance to $3.10-3.20 per share," said Donnie Smith, the Tyson Foods chief executive.

Wall Street had forecast a figure of $3.44 per share.

'Very high cattle costs'

The downgrade followed an April-to-June quarter in which Tyson Foods' earnings, while up 32% at $343m, or $0.80 per share, fell short of the $0.92-per-share result that investors had expected.

Mr Smith highlighted the setbacks in the group's division, which recorded an operating loss of $7m for the quarter, compared with a profit of $101m a year before.

"Our beef business suffered from export market disruptions that had an $84m impact," he said.

"And we continue to see very high cattle costs at a time when product values and export issues are making it difficult to realise expected revenue levels."

Margin squeeze

Supplies of fattened cattle remained squeezed, with improved rainfall, in improving pasture condition, and lower feed prices encouraging producers to rebuild the US herd from multi-decade lows rather than send animals for slaughter.

Meanwhile, beef prices, while hitting record highs, have been kept in check by competition with other proteins, and by a strong dollar which has encouraged US imports, besides discouraging exports.

US exports were also hampered earlier in the year by the US West Coast ports strike, which for Tyson meant a backlog of unfulfilled orders it was forced to sell at lower prices.

Beef packers have struggled to maintain positive margins, although a steepened retreat in live cattle prices over the past couple of months, amid a seasonal easing in beef demand, has reduced losses.

Beef packer margins were a negative $4.51 per head as of Friday, according to Hedgersedge.

Beef vs chicken

Tyson forecast its beef division margins in the group's 2016 fiscal year improving somewhat from the "breakeven" performance expected for 2015.

However, operating profit margins would be below the "normalised range" of 2.5-4.5%, the group said, assuming a 1% rise in supplies of fattened cattle.

"Although we generally expect adequate supplies in regions we operate our plants, there may be periods of imbalance of fed cattle supply and demand," it said.

However, for chicken, Tyson forecast its operating margin "should be at or above the top end of its normalised range of 7-9%", although this represents some decline from the 12% expected for the 2015 fiscal year.

Chicken profits in the latest quarter rose by 11.4% to $313m, helped by "strong demand", which raised Tyson's sales volumes, and by a $125m reduction in feed costs thanks to grain market weakness.

Takeover boost

The group revealed a jump to $197m in its prepared foods division, compared with a $1m loss a year before, with the improvement reflecting the takeover of Hillshire Brands, besides higher sales prices and lower costs for many meats.

Tyson Foods also raised to $300m, from $250m, target for synergy benefits from the Hillshire Brands deal.

By Agrimoney.com

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