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Crop Rally Challenges Meatpackers, Boosts Grain Traders

By Jacob Bunge

 

Soaring crop prices are changing fortunes for the biggest U.S. agricultural companies, delivering windfalls for grain trading giants while saddling meat producers with sharply higher costs.

Executives at Tyson Foods Inc. and Pilgrim's Pride Corp. said rising grain costs this year would pressure their chicken businesses, and could lead to increased prices for consumers. Costlier feed, typically the priciest part of raising a bird, comes as meatpackers are spending hundreds of millions of dollars on Covid-19 safety measures.

"The change in pricing in grains has been nothing less than enormous, and that is going to weigh on the business," said Stewart Glendinning, Tyson's chief financial officer, on a Thursday conference call. The grain market rally led Tyson, the biggest U.S. meat company by sales, to project lower results from its core chicken business this year, after in November forecasting an improvement.

Pilgrim's Pride, the second-largest U.S. chicken producer by sales, said that the higher cost to feed poultry is likely to be shared by supermarkets and restaurant chains. "When we have the contract negotiations with our key customers, we will also discuss the increase in prices due to the increases in the feed," said Pilgrim's Chief Executive Fabio Sandri.

Tyson shares dropped 5.7% in midday trading, with Pilgrim's down 5.4%.

Diminishing supplies and surging demand are driving agricultural commodity prices higher. After U.S. farm exports to China swooned during the two countries' trade war, they have rocketed back since last summer, driven by Chinese pork producers' efforts to rebuild hog herds lost to African swine fever. China in 2020 bought $26.4 billion worth of U.S. agricultural products, according to U.S. Census Bureau data, nearly double 2019's level, with corn exports hitting a record 6.9 million metric tons. U.S. soybean shipments to China rebounded to 34.6 million tons, almost matching 2016's record level.

The export rebound, combined with persistent dryness afflicting South American crops, has been a boon for companies that buy farmers' crops, trade them overseas and process them into food ingredients and animal feed.

Archer Daniels Midland Co. last month said it reaped more than $2 billion in profits from its grain trading and oilseed processing businesses in 2020 and projected record earnings in 2021.

Fueled by farmers rushing to sell crops at higher prices, rival agricultural trader Bunge Ltd. said rising grain markets and tighter global crop supplies have created what Chief Executive Greg Heckman this week called the best environment in years for grain merchants. St. Louis-based Bunge, the world's largest processor of soybeans, on Wednesday reported fourth quarter profits that surpassed analysts' expectations, and boosted its earnings forecast for 2021.

Mr. Heckman predicted that the world's supply of grains and oilseeds would stay constrained for some time. "This isn't going to solve itself with one crop in South America or even two crops," he said on a conference call.

The grain rally helped Minnesota-based Cargill Inc.'s crop trading and processing division deliver strong growth in profits in the last half of 2020, said Roger Watchorn, head of Cargill's agriculture supply chain for North America. Because prices are being driven higher by demand, versus a crop failure, the boom is benefitting U.S. agribusiness companies and farmers alike, he said.

Meatpackers are on the other end of the rally. At Tyson, Mr. Glendinning said that every 10 cent increase in corn's per-bushel price translates to an additional $25 million in costs for the company. Over the last three months of 2020, corn futures prices climbed from $3.89 a bushel to $4.84, according to data from CME Group Inc. The contracts have climbed further since then, closing near $5.64 earlier this week, with the most-traded contracts rising to their highest level since July 2013.

Higher grain prices arrive at an already difficult time for poultry processors. Prices for boneless, skinless chicken breasts -- typically among the poultry industry's biggest moneymakers -- fell to their lowest annual level in decades last year. Covid-19 dining restrictions meant fewer chicken dishes served at restaurants, building up supplies and pushing down prices. Mr. Sandri said a recent wave of chicken sandwich launches at fast-food chains are helping revive prices.

Colorado-based Pilgrim's Pride on Wednesday reported $330,000 in net income for the quarter ended Dec. 27, down from $92 million in the same quarter a year before. Executives said price swings and the pandemic challenged the company. Tyson reported its net income fell 7.5% to $467 million for its most recent quarter.

Pilgrim's Mr. Sandri said Thursday that recent rainfall in major crop-producing regions of Brazil and Argentina could improve prospects for harvests there.

"We believe these crops could help replenish global supplies later this spring," he said.

 

Write to Jacob Bunge at Jacob.Bunge@WSJ.com

 

(END) Dow Jones Newswires

February 11, 2021 13:03 ET (18:03 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.