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Troubles Not Over For U. S. Meat Firms

U. S. meat companies can expect a few more months of financial pressure as they work through supplies of high-priced feed and deal with soft demand for beef, chicken and pork amid a global recession, credit analysts said March 17.

Feed costs have come down and meat production is being reduced, which has raised optimism that U. S. beef, pork, and chicken companies will fare better by late 2009, experts said at the Reuters Food and Agriculture Summit in Chicago.

“I think the protein industry is coming out of the downside that it has experienced in the past year,” said Wesley Moultrie, senior director in corporate finance at Fitch Ratings. “The second half (of 2009) is likely to be better than the first half.”

U. S. meat companies struggled throughout 2008 and in early 2009 because of the high-priced feed and slowing meat sales. They responded by reducing production, particularly the chicken producers, who can react more quickly to demand changes than beef and pork producers.

There are still concerns, and Moody’s is more cautious on some of its meat industry credit ratings than Fitch.

“Until the supply side of the equation is normalized, we are going to continue to see stress in the poultry industry,” said Brian Weddington, vice-president and senior analyst at Moody’s Investor Services.

Moody’s has negative ratings on both Tyson Foods Inc. and Smithfield Foods Inc. Tyson is the largest U. S. meat producer, with beef, pork, and chicken segments, while Smithfield is the largest U. S. pork producer.

“In Moody-speak, that means that we think that within 12 to 18 months there is more of a chance than not that there will be a change in ratings downward,” Weddington said of the negative ratings.

Fitch has “stable” ratings on the two companies, which implies the ratings will not change over the next year.

“We do expect for the next quarter or two to see pressure on them. After that period is over, we expect them to enter a period of stability,” Moultrie said of the two companies.

Moody’s Weddington warned that meat companies are still vulnerable to unexpected shocks that could disrupt demand, such as a 2003 outbreak of mad cow disease in the United States which shut down a huge portion of U. S. beef exports.

“A shock like that would be very difficult for a company in this industry to handle right now. We are staying very cautious,” he said.

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