What's the Beef?

On December 10th the White House issued a statement Recent Data Show Dominant Meat Processing Companies Are Taking Advantage of Market Power to Raise Prices and Grow Profit Margins.  “It raises a concern about pandemic profiteering, about companies that are driving price increases in a way that hurts consumers who are going to the grocery store,” White House National Economic Director Brian Deese said at a news briefing.  Needless to say, the Beef Industry, notably Tyson Foods, were not happy with the White House statement. This piqued my interest as I had noticed substantial price increases in prime cuts of beef and veal during my regular visits to the butcher.  Were prices rapidly rising due to inflation driven increased costs of sales?  Was increased demand driving prices, As we learned in Econ 101? Or were meat processing companies following the old adage “Never let a good crisis go to waste.”

I decided to look at the big four meat firms, the middlemen between consumers and farmers and ranchers.  Those four firms are Minnesota-based commodity trader Cargill, Arkansas-based chicken producer Tyson Foods, Brazil-based meatpacker JBS, and Missouri-based National Beef Packing Co., which is owned by Brazilian beef producer Marfrig Global Foods.  I focused on Tyson Foods as they are a public American company with easily accessible financial statements and earnings call transcripts.  Tyson Foods is more than chicken, its brands include Jimmy Dean, Hillshire Farm, Ball Park, Aidells, and others with financial performance reported by Beef, Pork, Chicken, and Prepared Foods segments.

My Tyson Foods analysis would be simple, compare 2021 financial results against historic performance by focusing on sales and operating profits.  I would look at sales drivers (e.g. price, volume, mix) along with operational improvements (e.g. cost reduction, efficiency gains) that could explain changes in financial performance.

What I discovered was a story that didn’t add up. I focused on the Beef Segment; in 2021 it accounted for 38% of Tyson’s revenue and 74% of its operating income, but in 2019, the last year prior to the pandemic, the beef segment accounted for 37% of revenue but only 38% of its operating income.  In other words, product mix (Beef, Pork, Chicken, Prepared) was not a factor in driving corporate profitability. From 2019 to 2021 operating margins in the Beef Segment rose from 6.6% to 18.0%, sales increased by 14% while operating profits rose by 209%!  By contrast, from 2017 to 2019 in the Beef Segment, operating margins were comparatively flat rising only from 5.9% to 6.6% with sales increasing by only 7% and operating profits rising 20%.  How do you explain the sudden spike on the Beef Segment profitability in a business that had steadily been making mid-single digit operating margins to suddenly making 18% in 2021? I dug deeper into the 2021 10K(Q4):

• “Sales volume was relatively flat”

• “Average sales price increased as our input costs such as live cattle, labor and freight and transportation costs, increased and demand for our beef products remained strong.”

• “Operating income increased due to strong demand.” (confusing as 10K indicates Sales Volume was relatively flat.)

Throughout the 10K and the Q4 analysts call transcript management makes frequent references to increased costs of business: “During fiscal 2021, we incurred direct incremental expenses related to COVID-19 totaling approximately $335 million, which primarily included team member costs associated with worker health and availability, including direct costs for personal protection equipment, production facility sanitization, COVID-19 testing and vaccinations, donations, product downgrades, rendered product and certain professional fees, partially offset by The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) credits.”  “Increase in live cattle costs of approximately $160 million in our Beef segment”. With all these cost headwinds and flat unit sales, the Tyson Foods Beef Segment was able to deliver unprecedented profits.  The company claimed the Beef Segment benefited from “ample cattle supply”.  Vague references to operating efficiencies were made during the most recent analyst’s call, but nothing is quantified in the 10K.  

What Tyson did state is an understatement: “In parallel to our actions to improve volume, we have also work to recover inflation through pricing, achieving a 13% price improvement for the fiscal year and a 24% increase for the fourth quarter.”  “Our sales gains were largely driven by higher average sales price.”  

Tyson, did not let the “inflation crisis” go to waste.  They took their steady low growth beef business and turned it into a profit machine on the backs of ranchers and consumers.