Analyst: Tyson may try to force permanent cuts

Barclays Capital analyst Christopher Bledsoe wrote in a note to clients that the producer of chicken, beef and pork, may not want to "merely force other chicken processors to carry a disproportionate burden of this cycle's necessary production cuts."

He said instead the Springdale, Ark.-based company may want to make a more permanent cut, such as by holding out and essentially forcing its competitors to remove product from the market.

Removing product is "a step that is difficult for a processor to take without bankruptcy court protection since it requires an abandonment of contract grower relationships," he wrote.

The company said on Monday in announcing its fourth-quarter earnings that gains in its beef and pork units helped profit rise 50 percent, but high grain costs hurt its chicken business, leading to a $91 million operating loss in that sector.

High costs for key ingredients such corn and oil are shrinking profits for the nation's meat makers, especially for the thin-margin chicken business. Further hurting the industry is weak pricing, due to a drop in demand in foodservice and an oversupply of meat on the market, which keeps prices down.

So many companies, such as chicken market leader Pilgrim's Pride Corp., have pledged to cut production. Meanwhile, Tyson increased its volume about 6 percent in the latest quarter.

Bledsoe said if Tyson is trying to force a more permanent production cut--and not just a temporary rollback--"we believe it has reached the boiling point."

Pilgrim's Pride, suffering under a heavy debt load, has had to renegotiate credit with its lenders two times now. The latest waiver expires Nov. 26, and now Tyson has said it is "tight" on a key debt covenant, Bledsoe wrote, which calls into question its own finances.

He said Tyson may have given itself too little wiggle room by waiting to cut production, given the weak credit environment, slowing domestic chicken consumption, export worries as the U.S. dollar strengthens and other factors.