The U.S. food manufacturing industry has been under significant stress, amid recent threats from the coronavirus pandemic, shifts in consumer diets, and plunge in oil prices.
As some traditional meat and dairy processors have been scorched by the COVID-19 outbreak, uncertainties over the strength of supply chains have generally spurred fears about grocery store stocks.
(Click on image to enlarge)
Tyson Foods (NYSE: TSN) – the owner of popular brands Jimmy Dean, Hillshire Farm, and Ball Park – for example, recently cited in a news ad published in the New York Times, The Washington Post, and the Arkansas Democrat-Gazette that measures to contain the coronavirus have posed a “new set of challenges” for the company.
Tyson Foods chair John Tyson noted that the firm is “being forced to shutter its doors,” which “means one thing – the food supply chain is vulnerable.
“As pork, beef and chicken plants are being forced to close, even for short periods of time, millions of pounds of meat will disappear from the supply chain. As a result, there will be limited supply of our products available in grocery stores until we are able to reopen our facilities that are currently closed.”
Earlier in April, Tyson Fresh Meats – the beef and pork subsidiary of Tyson Foods – paused production at its Pasco, Washington facility, while an estimated 1,400 employees undergo testing for the virus.
Tyson said its Pasco plant produces enough beef in one day to feed four million people.
Meanwhile, Tyson Fresh Meats had already closed its operations at its largest pork plant in Waterloo, Iowa, and that its Logansport, Indiana facility had voluntarily closed, while its more than 2,200 workers undergo testing.
Tyson said its Logansport pork processing plant, which produces three million pounds of pork daily and helps support more than 250 independent farmers from across nine states, had suspended production for one day on April 20 for additional deep cleaning and sanitizing.
Tyson further claims that while other meat and poultry plants continue to operate, some are running at reduced levels of production either due to the planned implementation of additional worker safety precautions or worker absenteeism.
Indeed, employment in the food manufacturing industry has recently been declining, amid ‘stay-at-home’ and self-quarantine mandates, despite the essential nature of the business. At the end of March 2020, the sector had shed around 7,700 workers since about the start of the year, according to the U.S. Bureau of Labor Statistics.
(Click on image to enlarge)
Moreover, chair John Tyson added that since farmers will not have anywhere to sell their livestock to be processed, millions of animals – chicken, pigs, and cattle – “will be depopulated because of the closure of our processing facilities. The food supply chain is breaking.”
Against this backdrop, futures contracts for lean hogs were up between 6.33% and 7.28% on the day Monday, while the active live cattle contract rose a little more than 1.2%.
(Click on image to enlarge)
Tyson Foods, which has seen its shares plunge by roughly 35% year-to-date in 2020, is set to announce its second-quarter earnings on Monday, May 4. Analysts generally foresee the company earning around US$1.03 per share, down from US$1.20 in the same year-ago quarter.
S&P Global Ratings has upgraded the company’s credit rating by one notch to ‘BBB+’ from ‘BBB’ as recent as February 2020 despite having spent roughly US$2.5bn on acquisitions in fiscal 2019, including Keystone Foods and the Thai and European poultry operations from BRF Ltd.
S&P added that its ‘stable’ outlook on Tyson reflects its expectations that its “diverse portfolio will offset periodic earnings volatility that can affect anyone of its business segments, thus allowing the company to steadily reduce and sustain leverage in the mid-2x area despite remaining acquisitive.”
Some of Tyson’s bonds had come under some pressure Monday, amid an uptick in U.S. interest rates. OAS spreads on the firm’s 3.9% notes due September 2023, for example, widened by 3 basis points to 122bps more than matched-maturity U.S. Treasuries, and its 5.1% bonds due September 2048 were 4bps wider on the day at 257bps.
The yield on the benchmark 10-year U.S. Treasury note was last bid at around 0.657% – a rise of 5.7bps over Friday’s closing level.
(Click on image to enlarge)
Change in DIET
Traditional food manufacturers such as Tyson have also faced an increasing shift among consumers for what may be perceived as healthier food selections.
According to analysts at Deloitte, “many consumers have signaled a distrust of the established food industry in spite of retailers’ and manufacturers’ traditional efforts to keep consumers positively engaged with their brand.”
This change has also certainly held true for the U.S. dairy industry, which appears to be facing an ongoing dilemma, amid lower demand for conventional milk, lower intake for producers, and rising costs for consumers.
Futures prices on the May milk contract had risen more than 4.8% on the day Monday to US$11.32, according to the IBKR Mosaic Market Scanner.
(Click on image to enlarge)
The sector’s dim prospects have been compounded by oversupply amid virus-induced school closures, as well as a dwindling demand for fresh whole milk as consumers increasingly opt for plant-based alternatives.
In fact, changing dietary patterns had effectively led to the demise of iconic dairy firms Borden and Dean Foods, which each recently filed for bankruptcy, while U.S. farmers have struggled to resuscitate what seems to be the last breaths of a dying business.
Indeed, the U.S. plant-based retail market has been reaping the benefits of changing consumer behaviors – from fresh whole milk to alternative milks such as those sourced from almond, coconut, oat, hemp, and soy.
Some evidence may be gleaned from the performance of certain exchange-traded funds (ETFs), including Defiance’s DIET (NYSE: DIET)— a Next-Gen Food & Agriculture ETF, which was launched in mid-November 2019 – around the same time as Dean Foods’ Chapter 11 filing.
(Click on image to enlarge)
Defiance describes the fund as one that offers exposure to companies centered on “the whole range of technological, ethical, environmental and social challenges of ensuring food security.”
DIET, which includes among its top holdings former DowDuPont agrichemical company Corteva (NYSE: CTVA), Swiss flavor manufacturer Givaudan (OTCMKTS: GVDNY) and Canadian fertilizer firm Nutrien (NYSE: NTR), has seen its shares grow more than 23% to US$22.50 since its recent, late March low of US$18.28, according to the IBKR Trader Workstation.
Oil Gushes Losses
As production of meat and milk has faced massive oversupply, amid a precipitous decline in demand, oil has also been battling with an excessive overflow.
The recent plunge in the cost of crude has fallen at the heels of slowing global growth, weakening demand dynamics, and rising fears about defaults across the industry.
Although OPEC+ had recently come to an historic agreement to cut production, capacity seems to remain an issue for the glut in inventory.
Bill Baruch, president of Blue Line Futures, noted that while “Saudi Arabia has led a push from OPEC to begin the planned May 1st cuts immediately,” this does not “change the over-supply due to no demand; storage that is nearly full and crude oil that now has nowhere to go.”
Prices of crude oil on the June contract Monday plunged nearly 23.5% on the day to US$12.96.
As the impact from less demand for oil and gasoline has also adversely impacted related agricultural commodities such as corn, some companies have been shifting strategies to better align with market conditions in the wake of the coronavirus crisis.
Chicago-based Archer Daniels Midland (NYSE: ADM), for example, recently said it is redirecting its ethanol production throughout its U.S. corn processing network to focus on cash flows and to “divert corn grind to other products that are in higher demand, such as alcohol for hand sanitizer.”
ADM noted that it also reduced the ethanol grind at its corn wet mill plants and rebalanced grind to produce more industrial alcohol for the sanitizer market and industrial starches for the containerboard, or packaging, market to better align production with current demand.
As part of this process, ADM had temporarily halted ethanol production at the company’s corn dry mill facilities in Cedar Rapids, Iowa, and Columbus, Nebraska, effectively furloughing 90 employees in each facility for about four months, depending on market conditions.
The July corn futures contract fell around 2.85% on the day Monday to US$312.88.
Chris Cuddy, president of Carbohydrate Solutions – ADM’s corn processing division – said that these are “very difficult decisions in a very challenging time, and unfortunately, the current market conditions and the low consumer demand for gasoline at this time have greatly impacted the entire ethanol industry.”
ADM, which has seen its shares plunge by roughly 21.4% year-to-date in 2020, is set to announce its Q2 2020 earnings on Wednesday, April 29. Analysts generally think the company may earn around US$0.55 per share, up from US$0.46 in the same year-ago quarter.
(Click on image to enlarge)
Some of ADM’s bonds had also suffered somewhat Monday, amid the rise in U.S. interest rates. OAS spreads on the firm’s 2.75% notes due March 2025, for instance, widened by 2bps to 92bps more than matched-maturity U.S. Treasuries, and its 4.5% bonds due March 2049 were 1bp wider on the day at 212bps.
Aggregate OAS spreads on consumer staples companies Monday were 0.3bp wider on the day at a little more than 174bps.
Investors will likely be watching the upcoming earnings reports of Tyson Foods and ADM closely for any signs of financial, or further operational/supply chain distress stemming from COVID-19, consumer behavior changes, and plunge in oil prices.
In the meantime, for more insights, use the global bond scanner in the IBKR Trader Workstation to locate corporate bonds that are available to trade in the secondary market, along with U.S. Treasuries, municipal bonds, non-us sovereign debt and more.
Market participants can also construct and customize their own sector-specific stock universe using the IBKR Trader Workstation’s Mosaic Market Scanner.
Comments
Log in or sign up to join the conversation.