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Daily Intelligence Briefing

Tuesday, November 14, 2023

Identifying Change-Driven Investment Themes

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

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Margin Pressure on Meat Processors’ Beef Business Could Finally Begin to Break as Cattle Futures Fall

Summary: Earnings from Tyson Foods and JBS show each company’s beef business suffering from thinning margins. These cost pressures, induced by a shrinking cattle herd in the US, could linger an create a drag on 2024 sales at the companies. COVID-19 lockdowns, persistent drought, and the mass culling of beef cows that resulted from those factors, helped live cattle futures record a record run from March 2020 to September of this year, throttling profitability among beef producers. Input costs are finally beginning to subside a bit, suggesting beef processors margins could be set to improve. However, if falling futures prices for cattle are a result of softness on the demand side, further pressure on sales and profitability may lie ahead.


Related ETF & Stocks: Invesco DB Agriculture Fund (DBA), Tyson Foods, Inc. (TSN), JBS S.A. (JBSAY) 

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Tyson Foods surpassed analyst estimates regarding the company’s earnings per share (EPS) in Q4 of the company’s fiscal year 2023, reporting EPS of $0.37 versus expectations of just $0.25, according to MarketBeat data. Those earnings were cut by more than three quarters from an EPS of $1.63 reported in the same period one year ago. Revenue fell by a much smaller proportion, down just -2.8% YoY, but sales in the year ahead period are now forecast to stagnate near 2023’s $52.88 billion. Tyson further disclosed the shuttering of two processing plants related to its chicken business, as well as hundreds of layoffs resulting from those shutdowns, bringing the total number of its chicken facility closures to eight in 2023. Tyson’s shares shifted lower throughout Monday’s trading session on these results.


Though the chicken business has suffered this year, that segment is likely to get some relief next year and swing back into operating profitability. However, Tyson’s beef business – the largest segment in the company – is raising significant concerns, swinging to a loss in the prior quarter for the first time since 2015. Moreover, Tyson booked a -$333.0 million goodwill impairment on its beef business amid “unfavorable macroeconomic conditions” and higher interest rates, and projected a loss of as much as -$400.0 million for its beef operations for the fiscal year 2024.


Beef producers have languished under surging cattle prices throughout the year. Futures tied to live cattle touched an all-time high above $190.00/lb in September, easily surpassing the previous peak of roughly $170.00/lb nine years ago. These high input costs have challenged Tyson and its competitors to sustain their margins on beef products – a battle which they’ve been losing, as evidenced by the prospect of losses facing the segment. Operating margins in Tyson’s beef unit were reported at -6.4% in fiscal Q4, as well as -0.5% for the fiscal year 2023.


Tyson is not alone in its beef woes. Brazil’s JBS, the world’s largest meat producer, also reported earnings yesterday, missing analyst estimates on EPS and revenue alike. The latter category registered a more than -85.6% decline YoY. Bloomberg notes that adjusted profit from JBS’s North American beef unit plunged by almost -80.0% from a year earlier as profit margins narrowed. Sales in that segment, the company’s largest, did rise in USD terms, but declined slightly when translated to Brazilian Reals (BRL).


USDA data shows the US herd of all cows and cattle has shrunk for three consecutive years between the start of 2021 and 2023, pushing the inventory of beef cows to the lowest level since 1962. MRP joined Interactive Brokers’ podcast in June to discuss the ongoing decline in the size of the cattle herd, as well as its impact on live cattle futures. At the time, we noted that ongoing droughts were a key factor in reducing the number of cattle and that could lead to further upside in the futures market. Persistent shortages of water in some of the leading cattle-producing states, combined with knock-on impact of lockdowns in 2020 that shuttered meatpacking enterprises, led to a massive wave of culling.


USDA forecasts show domestic beef production is expected to decline by -6.3% YoY in 2024. MRP previously highlighted 2023 data on pasture and range conditions, which showed slight improvement since last year, but May’s first national look indicated just 33% was rated good to excellent while a larger 37% was poor to very poor. Though 26% of Texas’s pasture conditions are rated good to excellent, up 15% from the year prior, that is still below the national average. Conditions have deteriorated significantly in most of the other big states that we’ve mentioned as well. Oklahoma, Missouri, Kansas, and Nebraska have each experienced double-digit percentage declines in pastures considered to be in good to excellent conditions. The one consolation is that the western US, specifically the Arizona, Utah, Nevada and California conglomeration, have seen huge improvements, but their combined cow population is only 1.7 million, equivalent to just one top-5, powerhouse state like Nebraska.


Some good news is that the unrelenting rally in live cattle that continued almost unabated since March 2020 may have started to crack over the past two months, as futures fell to a nearly five-month low under $175.00/lb on November 6. Part of that could be an anticipated softening of the demand-side, however, which could present further negative prospects for companies that rely heavily on beef sales.  


Investors can gain exposure to livestock via the Invesco DB Agriculture Fund (DBA). Live and feeder cattle contracts are the third and ninth-largest holdings in the fund, respectively, carrying a combined weighting of 16.4%. The iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW) had been a more targeted way for investors to allocate toward cattle prices, but Barclays announced the delisting of that fund on June 7.


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