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Analyst: Tyson May Force Permanent Cuts

Meat giant may be trying to permanently eliminate excess capacity from the industry by not instituting its own chicken production cuts, an analyst wrote Wednesday.

MILWAUKEE (AP) -- Tyson Foods Inc.'s goals are becoming clear, an analyst wrote Wednesday, saying the meat giant may be trying to permanently eliminate excess capacity from the industry by not instituting its own chicken production 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.

"In an industry characterized by variables outside of any one processor's control and where 'expect the unexpected' has become the mantra, in waiting to cut production TSN may have left itself too little time and covenant flexibility to maneuver," he wrote.

Shares of Tyson, which have been falling steadily since Monday, reached a new 52-week low Wednesday of $4.25 earlier in the session. In morning trading the company's stock fell 12 cents, or 2.25 percent, to $4.99.

Shares of Pilgrim's Pride fell 2 cents, or 4.9 percent, to 40 cents. Its shares have practically eroded on its credit worries.

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