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It is the Industry Concentration Game--Producers lose

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Econ101

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US CREDIT - Analysts divided on Tyson swap widening

Reuters

Jan 31, 2006



NEW YORK, Jan 31, 2006 (Reuters) - Credit default swap spreads of meat processor Tyson Foods (TSN.N: Quote, Profile, Research) have widened in the past month on concerns about fundamentals in the company's beef and poultry business, but analysts are divided on whether the widening will continue.



Tyson, the largest U.S. meat processor, on Monday slashed its full-year earnings forecast, citing avian flu fears cutting overseas chicken demand and a slow recovery in its beef business. The company also posted a 19 percent drop in first-quarter profit.



Tyson Food's swap spreads have widened more than 20 basis points to around 78 basis points on Tuesday, from 55 basis points at the beginning of the year. Spreads on Tuesday, however, were little changed from levels before the company announced first-quarter earnings on Monday.



"The fundamentals have deteriorated a bit faster than we had anticipated and the visibility into their future earnings, at least for the balance of 2006 is murky at best," said Craig B. Hutson, senior bond analyst at Gimme Credit in Chicago.



"It just doesn't give us a lot of confidence that we are going to see much improvement here," Hutson said. Both CreditSights and Gimme Credit lowered their recommendation on the company's debt to "underweight," based on its first quarter earnings.



"They have a lot of head winds. Where (spreads) would go really depends on how difficult things become," said Andrew Brady, senior analyst at CreditSights in New York. Spreads could move out another 10-20 basis points from Tuesday's levels, he said.



The risk of avian flu spreading to the U.S. and the closure of Japan's borders to export beef is weighing on Tyson, Brady said. The company's free cash flow is also expected to fall and Tyson has talked about making acquisitions, which may make it less likely to continue paying down its debt, he said.



However, Frank Henson, high grade retail and consumer product analyst at Bear Stearns Cos. in New York, said although Tyson Foods lowered its earnings expectations rather dramatically yesterday, it wasn't that great of a surprise. He continues to rank the company's debt "marketweight."



"The market has likely already priced in several factors, including the reclosing of the Japanese border and anticipated weakness in the company's poultry division due to a slowdown in international demand for chicken leg quarters," Henson said.



"If investors or analysts are looking at the day-to-day pricing, they realize there has been a sharp fall off in poultry margins as grain costs have risen and chicken prices have fallen," he said.



That is why credit spreads did not drift wider after their earnings release, he said.





today.reuters.com
 

Econ101

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In the Industry Concentration Game, industries will run the profits out of a business segment (beef) with the help of another segment (poultry and pork)
and then consolidate the first segment at a discount. Industry consolidation is the result and producer lose in the long run because of lack of competition for their products.
 

Jason

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Another lie from Conman. The article said CHICKEN was in trouble.

The market has likely already priced in several factors, including the reclosing of the Japanese border and anticipated weakness in the company's poultry division due to a slowdown in international demand for chicken leg quarters," Henson said.



"If investors or analysts are looking at the day-to-day pricing, they realize there has been a sharp fall off in poultry margins as grain costs have risen and chicken prices have fallen," he said.


How can Tyson use profits from chicken to run out beef competition if the chicken division is under pressure and profits are slim there?
 

cowzilla

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Econ101 said:
In the Industry Concentration Game, industries will run the profits out of a business segment (beef) with the help of another segment (poultry and pork)
and then consolidate the first segment at a discount. Industry consolidation is the result and producer lose in the long run because of lack of competition for their products.
farmers have been playing that GAME FOR YEARS :!: Sometimes the cow calf profits cover the backgrounding losses or the other way around. Or the grain farm covers feedlot losses or the other way around. Or TOTAL FARM LOSSES are covered by off farm income or investments. Hell where do you think TYSON FOODS learned that trick :wink: Thats how farms continued to produce food.
 

Econ101

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Farmers don't have market power. There is a big difference there economically speaking between Tyson and farmers.
 

cowzilla

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Yeah :wink: The difference is Tyson Foods might not be here in twenty years. But there still will be Farmers producing Food :!:
 

Econ101

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cowzilla said:
Yeah :wink: The difference is Tyson Foods might not be here in twenty years. But there still will be Farmers producing Food :!:

Just like the man said about the date on the tombstone, it is the dash that counts. I am worried about that time in between.
 

DiamondSCattleCo

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cowzilla said:
Yeah :wink: The difference is Tyson Foods might not be here in twenty years. But there still will be Farmers producing Food :!:

Maybe there will be farms producing food, but I think in the next 20 or 30 years, we're not going to have many "farmers". At least not farmers in the way we think of them now. Grain production is now mostly in the hands of large company or corporate farms. The small timer has died out.

Feedlots are getting larger and larger every year. The family cow/calf operator is going to be gone as well. I firmly believe that market concentration is causing this, as bigger operators simply don't want to deal with the small operator, even if the small operator can do things economically. Packers only want larger lots of livestock, large feedlots only want larger lots of animals. In order to sell your stock, the cow/calf guy is going to have to get larger and larger.

Rod
 
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DiamondSCattleCo said:
cowzilla said:
Yeah :wink: The difference is Tyson Foods might not be here in twenty years. But there still will be Farmers producing Food :!:

Maybe there will be farms producing food, but I think in the next 20 or 30 years, we're not going to have many "farmers". At least not farmers in the way we think of them now. Grain production is now mostly in the hands of large company or corporate farms. The small timer has died out.

Feedlots are getting larger and larger every year. The family cow/calf operator is going to be gone as well. I firmly believe that market concentration is causing this, as bigger operators simply don't want to deal with the small operator, even if the small operator can do things economically. Packers only want larger lots of livestock, large feedlots only want larger lots of animals. In order to sell your stock, the cow/calf guy is going to have to get larger and larger.

Rod

I have to agree with you Rod-altho it makes me sad...

I was reading on the State labor website the other day where they were projecting jobs and occupations in the next 12 years.....At the bottom were farm/ranch labor demand projected to decrease by 330% and farm/ranch owners and or managers demand projected to decrease by 350%....

Looks like they believe the Cargil/Tyson & Walmart world will win the war...... :cry: :mad:
 

Jason

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Haven't you guys figured it out yet that 1 man can only look after so many cows before running out of time, energy, resources etc?

As costs rise how can the consumer be expected to pay more and more for everything they buy? Remember we are not just talking beef. They have to buy food, clothing, shelter, transportation, medicine, insurance. If they have money left over they buy entertainment or luxury items.

The days of land being valued at what it produces have long since passed. There isn't any new land being made.

The result is the number of cows per operation have to increase if there isn't more per cow that can be squeezed.

I don't hear anyone complaining they wean 600 pound calves now when they were weaning 400 pound calves a few years back. So why the complaints when the ranch expands to have a manager and professional wranglers so the numbers can increase?

As for grain farmers, soil science and the enviroment have changed that industry and will change even more in the future. Excessive chemical use is not sustainable. Machinery can't get much bigger, logistically how many fields can accomodate 80 foot implements?

Advancements are not always bad. Consider the average life span of ranchers or farmers at the turn of the 19th to 20th century. I know my Granddad had 11-15 men here working to cover 60 cows and 1000 acres, now I have more cows and less cultivated acres but more hay and cover it with my semi retired dad.

Things will change. That can not be stopped. Our job is to make sure we keep the values passed to us from the previous generation alive. How many fought tooth and nail when they got electricity, running water, central heat?
 

Econ101

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Jason said:
Another lie from Conman. The article said CHICKEN was in trouble.

The market has likely already priced in several factors, including the reclosing of the Japanese border and anticipated weakness in the company's poultry division due to a slowdown in international demand for chicken leg quarters," Henson said.



"If investors or analysts are looking at the day-to-day pricing, they realize there has been a sharp fall off in poultry margins as grain costs have risen and chicken prices have fallen," he said.


How can Tyson use profits from chicken to run out beef competition if the chicken division is under pressure and profits are slim there?

The chicken market reacts much more quickly to price than beef ever could. Chicken is the major substitute for beef. When chicken goes down, what do you think happens to beef, Jason? Can't you connect any dots on your own?

I already posted the article on Tyson making its earnings in chicken. Do you deny that it was posted? Do you deny that Tyson was making all its money in chicken and losing in beef? That time is coming to an end as the chicken market softens up due to a changing supply/demand equilibrium.

When pressure is put on the beef industry due to the (negative, as Agman calculates it) margins, and they have money left over from their chicken operations, what do you think they can do with that leftover money? They can buy out the other struggling competitors in beef!!! It is the market concentration game.

Do you think they can do the same thing in the poultry industry when they are using their market power to depress prices in beef? Try to connect the dots and think about the topic of the thread.
 

DiamondSCattleCo

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Jason said:
1) Haven't you guys figured it out yet that 1 man can only look after so many cows before running out of time, energy, resources etc?

2) As costs rise how can the consumer be expected to pay more and more for everything they buy?

3) I don't hear anyone complaining they wean 600 pound calves now when they were weaning 400 pound calves a few years back. So why the complaints when the ranch expands to have a manager and professional wranglers so the numbers can increase?

1) Understood, but in my area, 1 man can tend to 200 head. It'll keep him busy, but it can be done. Unfortunately, I believe the days of 200 head cattle herds are numbered. I guess I believe that 1 man, who is working full time, isn't unreasonable to expect that he can make a decent living.

What also bothers me is that the smaller guys will be barred entry from the market simply due to insufficient numbers of animals. That isn't right, especially since many small producers can produce pounds of animal for less than big producers. Economies of scale are great things, but eventually the outfits get too large, and then efficiency begins to slip and costs rise. There is an optimum size.

2) See above. Keep the smaller guy in business and it'll keep the bigger outfits efficient.

3) Some change is good, some is bad. I believe the death of the family farm is bad.

Rod
 

Jason

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Conman again you shoot your own foot off.

Chicken is under pressure and it leads to more pressure for beef.

You admit Tyson was making their money from chicken not beef, but somehow magically when they lose on both they will be able to buy competitors out?

I bet some mixed farms would love to know how you can lose money on cattle and grain yet expand on those losses.
 

Jason

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Rod why does the change of going to more cattle with mangers and wranglers mean the family farm is gone?

The wranglers are likely family people, if they are hired they just get a wage instead of the risk.

The managers are likely family people too. They could be hired marketers, financial types or such and not be the "boss" over the wrangler owner type guy.

The benefits of the corporate world being adopted by the family farm is different but doesn't mean the people will change, just their job description might be adjusted somewhat.
 

Econ101

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Jason said:
Conman again you shoot your own foot off.

Chicken is under pressure and it leads to more pressure for beef.

You admit Tyson was making their money from chicken not beef, but somehow magically when they lose on both they will be able to buy competitors out?

I bet some mixed farms would love to know how you can lose money on cattle and grain yet expand on those losses.

What is the matter with you, Jason? Go up and read the bold print in the article. They already have cash from their chicken operations where they already made their money. I already posted the article on that about a month ago. When you have money in the bank, you can go a while without making more money. Do you ever do any budgeting? Does your wife do your checkbook? The article points out that they have money already, and that they may use it in their acquisitions or pay down debt. Those are two things you can do with retained earnings.

The low point in the chicken business is poultry at 52 cents per lb whole. We are still way above that number, even though the market is soft. Here is the link to the current Georgia Dock prices. Look it up yourself (you might want to just keep griping about me not posting any real numbers) or look at the below market report (by the way, these are real facts and figures):

AJ_PY018
ATLANTA, GA Fri. Feb. 3, 2006 Federal-State Market News

BROILER/FRYER: Georgia F.O.B. Dock Broiler/Fryers-Parts Prices (Mon/Wed/Fri)


The Georgia f.o.b. dock quoted price on broilers/fryers for this
week's trading is 69.25 cents based on ice-packed USDA grade "A"
sized 2 1/2 to 3 pound birds.
PRELIMINARY FOB DOCK OR EQUIVALENT
LOADS RANGE PRELIM. WTD. AVG.

914 65.62-70.00 69.10

Georgia f.o.b. dock confirmed preliminary weighted average price
on ice-packed parts:
WTD. AVG. VOLUME
ITEM (CENTS PER POUND) (000 POUNDS)
LINE RUN TENDERS 136.00 1,226
BREASTS - B/S 112.00 5,499
BREASTS - WHOLE 58.50 1,283
THIGH MEAT - B/S 96.00 970
LEG QUARTERS 25.00 7,534
WINGS 99.50 2,860

This information is supplied by the Georgia Department of
Agriculture's Poultry Market News Service.

SOURCE: USDA/AMS Poultry Programs, Market News Branch
Atlanta, GA 404.562.5850
http://www.ams.usda.gov/mnreports/AJ_PY018.txt

Prepared: 03-Feb-06 11:03 AM MCB
 

DiamondSCattleCo

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Jason said:
Rod why does the change of going to more cattle with mangers and wranglers mean the family farm is gone?

The wranglers are likely family people, if they are hired they just get a wage instead of the risk.

The managers are likely family people too. They could be hired marketers, financial types or such and not be the "boss" over the wrangler owner type guy.

The benefits of the corporate world being adopted by the family farm is different but doesn't mean the people will change, just their job description might be adjusted somewhat.

Working conditions will change. Working for a wage is different than working for yourself. As an example, when I was working for a wage from a company, I was expected to be at my desk between 8 and 5. Its not unreasonable for the company to expect that. However, when I took on contracts, I didn't have to be chained to a desk. During the day, I could play with my son, spend time with my wife, go for coffee with the neighbors and simply work the time in the evenings when most people/kids are bedded down.

The same holds true for the family farm. Its a more relaxed, flexible lifestyle. I can put off feeding the critters for an hour, or cleaning a pen for a couple hours to spend some time with my family, then make the time up later in the evening. My family appreciates it as I've taken the time to be with them. My son is going to grow up with fond memories of the old man burying him a snowbank and maybe, just maybe, it'll help him say NO when someone offers him a hit of acid.

And the cows are still fed, watered and well tended to.

If I were working for a corporate farm, I simply wouldn't have that opportunity. The corporate farm couldn't allow that kind of behaviour from its employees. Think of the management nightmare if all your workers kept different hours.

Rod
 
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The packing industry has never been more concentrated and cattle prices have never been higher?

Bad for producers?

Depends on whether you believe doomsday profits like Conman or the facts.

Smaller less efficient packing companies couldn't pay up for cattle and compete with the larger more efficient packing companies and that is why they are gone.

Want to lower cattle prices? Break up the large packers and create more smaller less efficient packing companies.



~SH~
 

Econ101

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~SH~ said:
The packing industry has never been more concentrated and cattle prices have never been higher?

Bad for producers?

Depends on whether you believe doomsday profits like Conman or the facts.

Smaller less efficient packing companies couldn't pay up for cattle and compete with the larger more efficient packing companies and that is why they are gone.

Want to lower cattle prices? Break up the large packers and create more smaller less efficient packing companies.




~SH~


I bet people like robert mac and rkaiser are getting more money FROM CONSUMERS than Tyson is per lb. Tyson is just paying the cheapest game in town. rkiaser and robert mac are selling VALUE. I bet the quality in the little deals are a lot better than from the big packers. If it were not so, why would they have to play the little market games against people like rkaiser and why would they have to control the producer's advertising checkoff money through the USDA?
 

Sandhusker

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~SH~ said:
The packing industry has never been more concentrated and cattle prices have never been higher?

Bad for producers?

Depends on whether you believe doomsday profits like Conman or the facts.

Smaller less efficient packing companies couldn't pay up for cattle and compete with the larger more efficient packing companies and that is why they are gone.

Want to lower cattle prices? Break up the large packers and create more smaller less efficient packing companies.



~SH~

Hate to tell you this, SH, but there are many factors that figure into cattle prices. To lock onto one is very foolish.
 

DiamondSCattleCo

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~SH~ said:
1) The packing industry has never been more concentrated and cattle prices have never been higher?

2) Want to lower cattle prices? Break up the large packers and create more smaller less efficient packing companies.

1) SH, you're attributing today's higher prices with packer concentration, and I truly believe you are in error. If you take a look at long term demand, you'll see its been steadily increasing over the years, as such, prices have went up.

2) Thats speculation. My own beliefs, backed by sound economic theory, but also speculation, says that if we had another 10 or 12 equal sized players in the market, we'd be much further ahead. We'd have the increased demand of today's market, combined with the increased competition from multiple packers bidding on our animals.

The biggest benefits of economies of scale come from making individual plants larger and more efficient, not from one company owning several plants. You may see some benefit on the administration side, but thats insigificant, and not able to offset the reduced competition on the bidding side. And there is definitely NO benefit to allowing a large corporation to own interests in several competing markets. If one industry is suffering, they'll use the profits from the other industry to maintain company health. They'll have no impetus to help revive the struggling industry.

Rod
 

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