According to the report, protein companies continue to benefit from tight overall domestic supply and good pricing. However, producers are facing elevated feed costs while processing margins, particularly for value-added prepared foods and packaged meats, are being pressured by high beef and pork procurement costs.
Fitch expects high feed costs to restrain production increases across the entire protein complex in the near term. "Signs of a pullback in chicken are already becoming apparent," said Carla Norfleet Taylor, director at Fitch. Exports are also anticipated to remain strong given growing foreign demand caused by rampant food price inflation in emerging markets and recent disruptions in major markets such as Japan and Korea.
Fitch expects livestock prices to remain high if export demand increases and production remains flat or declines as currently anticipated. Furthermore, ethanol and export demand will affect corn prices but spring plantings and the fall harvest are likely to be the key determinants as to whether corn prices remain elevated.
Ina separate report, Fitch stated that credit ratings of the major U.S. protein companies are expected to remain stable despite high corn prices, which approached $7/bushel earlier this year but have since eased. Fitch upgraded Tyson Foods Inc.'s Issuer Default Rating (IDR) one notch to 'BBB-' on Feb. 23, 2011 and Smithfield Foods Inc.'s IDR two notches to 'B+' on Jan. 31, 2011. The Rating Outlook for both companies is currently Stable.
Moderate near-term margin deterioration is anticipated and has been factored into the companies' ratings. However, significant debt reduction, incremental operating efficiencies and more astute hedging practices are expected to lessen the likelihood of severe declines in credit quality. Furthermore, tight overall protein supply and stable to increasing livestock and poultry prices are expected to continue. Fitch expects high feed costs to restrain production while export conditions, particularly for beef and pork, remain favorable.
"Bondholders should be able to rest a little easier knowing that the industry has embraced a more conservative financial strategy," said Carla Norfleet Taylor, Director at Fitch. "Unlike in 2008, when corn prices peaked at over $7/bushel, the protein industry is much better positioned to navigate through the current high feed cost environment."
The reports are available on Fitch's website: www.fitchratings.com.
Source: Fitch Ratings