Unintended Consequences (Unless You’re a Corn Farmer) of Ethanol: Pricier Meat, Tyson Troubles

The news is bad at Tyson Foods (TSN), the nation’s largest meat company, where earnings plunged from $196 million to $76 million last quarter. And it’s not because millions of Americans are willingly following Bill Clinton into vegetarian diets. Rather, they’re simply too poor to buy steak – and if they have any extra cash, they’re using that to buy ethanol instead.

Tyson’s fortunes are tied to jobs, weather and public policy, and none of them are working in its favor. With the unemployment rate at 8.3%, Americans are still wary of splurging, even if it’s on cuts of meat. It reported that beef and pork sales fell, 1% and 5% respectively.

On top of that, Tyson’s animals are competing with cars for their bite of the nation’s corn crop. Because the rules say 10% of our gas has to be corn-based ethanol –- although the environmental argument for that is dubious at best – up to 40% of the corn crop goes to cars. That demand drives up the cost of corn. And even worse for Tyson, this summer’s drought has sent grain prices soaring.

US Corn Farm Price Received Chart

US Corn Farm Price Received data by YCharts

CEO Donnie Smith said the company plans to pull back on capital expenditures.

TSN Capital Expenditures Chart

TSN Capital Expenditures data by YCharts

He also said he’ll be prudent with cash.

TSN Cash and ST Investments Chart

TSN Cash and ST Investments data by YCharts

Still, profits will likely fall.

TSN Profit Margin Chart

TSN Profit Margin data by YCharts

But although people aren’t buying beef or chicken at the store, they’re still eating chicken out. The rising price of corn has sparked some political pressure to lift the ethanol mandate. And Tyson raised the price of chicken wings a whopping 128.5% -- knowing full well that at Super Bowl time, you sports nuts out there will probably buy them anyway.

From the editors of YCharts.YCharts Pro Investor Service includes professional stock charts, stock ratings and portfolio strategies.



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