Sluggish protein market forces Tyson downgrade

By Anita Awbi

- Last updated on GMT

Related tags Tyson Meat

US packaged meat processor Tyson Foods has been downgraded by
Moody's Investors Service, following concerns the firm cannot cope
with the current slump in global meat sales.

Moody's said Tuesday the relegation reflects a deterioration in Tyson's operating performance and debt protection measures, as doubts rise over the firm's ability to cut costs and adapt to the soft protein market.

The New York-based analysts assigned the firm a low "speculative grade liquidity rating"​, adding that should Tyson be unable to improve its performance, ratings could come under increasing pressure.

"This rating action reflects Moody's view that, despite its size and diversity and the uncertainties inherent in the global protein industry, Tyson has not exhibited the level of stability and predictability we expect from an investment grade protein company,"​ said Moody's senior vice-president Peter Abdill.

Moody's said Tyson's operations have been "severely impacted"​ this year due to weak supplies and high raw materials prices in the beef market, aggravated by continuing bans on beef exports to South Korea and Japan following recent BSE scares. The worldwide avian flu phenomenon, causing the poultry industry to crash, has also hit Tyson's profits.

What's more, Tyson's recent high-spending policy aimed at increasing sales of value-added and branded protein products may have damaged its ability to ride out the difficult trading environment.

In a U-turn Tyson is now pursuing a cost reduction initiative to try to redress the over-spend.

Earlier this month the packaged meats giant announced plans to axe 420 jobs and execute a tough $200m (€156.9m) savings plan.

The new savings program expands on chief executive Richard Bond's original $110m plan, and will concentrate on slashing staff levels, consulting fees, travel and sales-related expenses and supplies.

But Tyson acknowledged it can't just save its way back to profitability, and will also work to improve cost management, introduce more value-added products, bolster operational efficiencies and expand its international business to encourage "top line growth"​.

With sales of over $26bn Tyson is the world's largest protein processor with operations in beef, chicken and pork, as well as branded packaged foods.

The manufacturer reduced its yearly profit forecast in May, indicating weaker than expected operating performance and sluggish earnings as it revealed a $127m loss for the second quarter of 2006.

However there could be tougher times still to come. According to FAO figures, prices for beef, pork and poultry on the world market will fall 5.8 per cent this year, as supply and demand problems hit the industry.

"In a reversal from 2005, when the FAO meat price index (calculated using trade weighted indicative international prices) peaked at a near 15 year high of 126 points, sharply lower poultry prices in early 2006 have prompted a decline in the index to 112,"​ the organisation said in a statement.

An overall weakening of meat demand, uncertain price prospects and escalating trade restrictions in 2006 are expected to limit global meat output to 272.5m tonnes, up only 1.6 per cent from last year's 268.1m tonnes.

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