Tyson Foods Inc. (TSN) was holding its ground in pre-market hours Monday as the trade war hits a fever pitch and much of the market falls.
Shares of the Springdale, Arkansas-based food giant were up slightly before Monday's opening bell after reporting fiscal third-quarter earnings of $1.47 a share, essentially flat from last year and matching the Street consensus forecast. Meanwhile, group revenue rose 3.6% from last year to $10.855 billion, narrowly missing analyst estimates of $10.95 billion.
Tyson shares are up nearly 50% year to date despite some stagnation in recent months after a rapid run earlier in the year.
"Overall, third-quarter earnings were in line with our expectations," Tyson CEO Noel White said. "Volume growth in our core retail lines continues to outpace other large food companies and the total food and beverage category, driven primarily by our new product innovation."
The beef prepared foods segments were noted for particular strength as average sale prices increased and were streamlined following the company's big acquisition of Keystone Foods in the fourth quarter of 2018. Chicken results were more mixed as volume increased, but average prices fell 11.4%.
Looking at all of 2019, Tyson Foods said it is maintaining sales guidance in the $43 billion region, with earnings per share in the range of $5.75 to $6.10, while 2020 should see an increase in protein production of around 2% from the previous year's levels.
The guidance appears to have affirmed Tyson's "safe haven" status as a consumer staples stock.
Spark in Swine
However, Tyson Foods is not immune to the impact of the trade war on the overall food industry as pork continues to struggle and hog costs increase.
"The African Swine Fever outbreak continues to take its toll on hog supplies in Asia; however, we have not yet experienced significant benefits to our Pork, Chicken or Beef segments," White said. "Given the magnitude of the losses in China's hog and pork supplies, the impending impact on global protein supply and demand fundamentals is likely to be a multiyear event."
The potential for a multiyear event is significant as Chinese consumers eat nearly three times the world average of pork per year and outpace U.S. consumers by about 25% in terms of pork consumption annually, according to data from the Organisation for Economic Co-operation and Development.
The growth in protein consumption overall, led by pork, has been a stable trend in the region for some time as a growing middle class has increased its appetite for meat, with pork consumption increasing 13 pounds on an annualized basis over just the past six years.
The issue is clearly not demand for pork products. The real problem now is in the supply of pigs to feed the demand, as African swine flu (ASF) overtakes the region and forces Chinese oversight agencies to cull pig populations and prevent the spread of the epidemic.
"The virulence and ease of transmission of this porcine disease, coupled with the wide geographic distribution could significantly impact China's swine population and the availability of domestically produced pork," a U.S. Department of Agriculture Foreign Agricultural Service report states.
Judging by reports from the Chinese ministry of agriculture and rural affairs, much of these fears have come to fruition and have been more acute than initially expected.
The latest reports reflect a 23% decline in live pig stocks compared with May 2018, as ASF outbreaks across multiple provinces has led to the culling of pig populations.
Up to 200 million pigs will be killed either by the disease or action to curb the outbreaks, according to a Rabobank report, The severe reduction in pig population would curb pork output in the nation by almost one-third in total this year, according to the report, leaving demand woefully under-supplied.
"Since China is the largest swine producer and pork consumer in the world, a major ASF outbreak can have a significant impact on China's food security and trade," the USDA said.
Consumers can turn to alternative sources and poultry is projected to grow in popularity amid consumer concerns about pork, but it is unlikely to fully replace the massive market for pork.
In addition, an underdeveloped cattle industry makes the market for alternative proteins even more tightly squeezed and forces imports from both the U.S. and Australia to satiate the demand for the product as a replacement for the popular pork even amid escalating tensions.
"The USDA indicates that Chinese pork production will decrease by more than 10% in 2019, and therefore, China will rely on more imports," CFRA analyst Srun Sundaram said in a recent note confirming his bullish view. "Even with the current 62% tariff on U.S. pork imports, China recently made its biggest purchase of U.S. pork in nearly two years. We think this is due to record low U.S. pork prices, which would offset the tariffs, as well as anticipation of a nationwide shortage of pork due to the disease."
With the acquisition of Keystone Foods adding to its pork supplies late last year, Tyson could be a key piece to trade negotiations.
Conference Call Questions
The main questions pertaining to equilibrium are the changes in consumer tastes outside of China toward plant-based food products after Tyson dropped a stake in the meteoric Beyond Meat (BYND) and the length that investors can expect to stay on board before a dam breaks on the Chinese trade.
A conference call is expected to cover more details on these subjects at 9:00 a.m. ET. Click here to tune in.