The effects of the economic downturn on consumer spending are becoming more apparent by the day. And, as the crisis on Wall Street and stock markets round the world gathers pace, our industry is faced by a set of economic pressures unprecedented in recent times. In a new series, just-food will review the fast changing financial landscape and ask what now for the food industry? This week Dean Best turns his eye on the meat sector.
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“Everyone is leveraged – companies are leveraged, governments are leveraged and individuals are leveraged.”
The words of one US analyst hammer home just how bleak the global economic turmoil is right now. However, to what extent is the chaos in the financial markets affecting us here in the food industry? Even as recently as a few months ago, commentators were describing the food sector as “recession-proof”. “Everyone has to eat,” was the war-cry. And although that bullishness has become more qualified – the food industry has since been described as “recession-resistant” – those who think this crisis starts and ends in Wall St and derivatives are foolish.
Of course, we have been seeing the effects of the economic downturn on consumer spending for months. Retailers of all colours are facing a consumer increasingly shopping on price; the days when the likes of Tesco boss Terry Leahy would claim that interest in the provenance of food and cooking was driving rising food spending seem a world away. Now, shopping bills are higher for a whole different reason – fuel and commodity costs – and retailers are falling over themselves to be sense as the company that is offering the most respite to consumers.
Suppliers have been facing higher fuel and commodity costs for months but now, with the convulsions in the credit markets, they are facing a nightmare scenario. With costs rising and margins being further squeezed due to weak consumer spending, the outlook for some food manufacturers is distinctly gloomy. Throw in the fact that credit has become increasingly difficult to obtain and we are starting to see signs in food that companies are struggling to survive.
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By GlobalDataNowhere is that more true than in the meat sector. The industry has gone through its own turmoil in the last 12-18 months as processors faced soaring feed costs. Companies have sold off assets and restructured in a bid to withstand the economic headwinds but, for some, the credit crunch could deal the fatal blow.
Take Pilgrim’s Pride, the US poultry giant. Squeezed by high feed prices and weak prices and demand for breast meat, the company has changed the face of its business. A series of restructuring measures has led to the loss of 2,300 jobs but, unfortunately for the company, it may still not be enough. Last month, Pilgrim’s admitted it had broken an agreement with its lenders and, although the banks have waived the covenant until 28 October to ensure the company’s has the liquidity to continue to operate, its future is far from certain.
“At this point, we see there as being a 50:50 chance of bankruptcy,” Ann Gilpin, an equity analyst in the US with brokers Morningstar, tells just-food. “Commodity costs have risen – corn and soya – and that’s affected feed costs, while poultry prices have not risen and there is an over-supply on the market. The company’s interest costs are fixed and it has a very high debt load after its acquisition of Gold Kist in 2006. It’s a very toxic mix.”
Smithfield Foods, another US meat processor, has faced questions over its future. Last week, Smithfield moved to reassure investors that it had adequate liquidity and that it was meeting its lending agreements after its shares plunged 21% in a day over concerns about its balance sheet.
Smithfield’s plight does not appear to be as perilous as Pilgrim’s and recent moves to reshape the business – including the planned sale of its beef business to Brazil’s JBS – should leave the hog and pork group on a firmer financial footing. However, Gilpin has her concerns about the business. “Smithfield is very highly leveraged. If you look at the debt-to-equity ratio for Tyson, it’s 0.64; for Pilgrim’s Pride, it’s 1.33 and for Smithfield it’s 1.22,” she says.
And, while Gilpin is confident about the financial position of industry leader Tyson Foods, she adds: “The meat-packing business is not a good business to be in right now; businesses aren’t in great financial health.”
With weaker consumer spending forecast, the situation is unlikely to improve any time soon. Hard-up consumers want value and the demand for cheaper meat, potentially from developing markets, could prove a factor in the fortunes of home-grown meat processors. Demand for imported chicken is said to have been a critical element in the downfall of Irish poultry firm Cappoquin, which confirmed this week that rescue talks to save the business had failed.
An, on the other side of the world, the financial crisis has put paid – for now – to a deal set to breathe fresh life into another meat giant. New Zealand’s largest meat processor, Sliver Fern Farms, had agreed to sell a 50% stake in the business to local agricultural group PGG Wrightson but problems in securing the financing meant the deal has been postponed. Silver Fern, which had been busy restructuring its business as sheep and lamb numbers fell, had trumpeted the merits of the deal but now faces an anxious wait to see how long it will take for financial markets to settle.
How long that will take is anyone’s guess.
