The consumer backlash against a meat product made from leftovers and treated with chemicals is making a bad situation worse for Cargill Inc. and Tyson Foods Inc. (TSN) ahead of the beef industry’s peak sales period. Kroger Co. (KR), the largest U.S. grocery-store chain, last month stopped buying ground beef containing what processors call lean, finely textured beef, while Wal-Mart Stores Inc. (WMT) said it would offer customers meat without the additive. Lower demand for the product -- dubbed “pink slime� by critics -- has prompted Cargill, the biggest U.S. beef processor, to scale back output of the lean meat at four plants. Tyson says beef supply will decline. The companies, already dealing with higher cattle costs, may start labeling ground beef with the product as the industry tries to back shoppers’ confidence ahead of the U.S. summer grilling season. “If demand remains lackluster, it will impact beef processors’ profitability,� Farha Aslam, an analyst at Stephens Inc. in New York who has a hold rating on Tyson shares, said in an interview on April 10. Ground-beef sales, including trimmings, fell 11 percent to 37.7 million pounds in March, the smallest amount sold for that month in 10 years, according to U.S. Department of Agriculture wholesale data compiled by Bloomberg. Packers saw prices for wholesale choice beef fall 7.8 percent in March, the most since October 2008, USDA data shows. Shrinking Herds Even before lean, finely textured beef became a live issue for the meat industry last month, the U.S. beef industry was paying more for corn used to feed cattle while prices of the animals rose after a drought in the southwest U.S. shrank herds. U.S. processors on average have lost money on the cattle they slaughtered since September, according to Stephens. Losses per head have averaged $82.14 this year, the investment bank estimates. Cargill, the biggest closely held U.S. company according to Forbes, said April 10 that fiscal third-quarter profit at its meat unit was “well below� last year’s record earnings. Michael Martin, a spokesman for Cargill, said the company doesn’t discuss profits or margins. Tyson’s beef business saw operating income fall 73 percent to $31 million on sales of $3.47 billion in the quarter ended Dec. 31. The Springdale, Arkansas-based company, which is the largest beef processor after Cargill, said Feb. 3 that beef margins would “recover� in the six months through September. The recent furor has delayed that recovery, Aslam said. ‘Inaccurate Portrayal’ Vincent Andrews, an analyst at Morgan Stanley in New York, cut his full-year earnings estimate by 5 cents to $1.85 a share, partly because of the pressure on beef margins from the controversy. Andrews also reduced his projection for operating profit at Tyson’s beef business by 53 percent to $87 million for the year through September, he said in a note yesterday. Tyson rose 1.2 percent to $18.10 in New York yesterday. It has dropped 12 percent this year, while the Standard and Poor’s 500 Consumer Staples Index has climbed 4.9 percent. Tyson said April 2 it doesn’t expect any plant closures following the decline in demand for lean, finely textured beef, also known as LFTB. Gary Mickelson, a Tyson spokesman, declined to comment on the impact on Tyson’s earnings and referred to Chief Operating Officer Jim Lochner’s March 27 comments that the bad publicity had “an impact negatively on ground-beef demand, which will recover I think quite quickly.� Warm Weather To be sure, U.S. beef consumption has been in decline for several years, according to the USDA, albeit at a slower pace than March sales data suggests. Americans will on average eat 55.4 pounds of beef in 2012, down 3.3 percent from last year, according to USDA estimates. Consumers have opted for cheaper cuts and reduced restaurant visits, said Heather Jones, an analyst for BB&T Capital Markets in Richmond Virginia. The early arrival of warm weather across the U.S. this year may be a boon to margins in Tyson’s beef unit, said Ann Gurkin, an analyst at Davenport & Co. who’s also based in Richmond. Jones and Gurkin both recommend buying Tyson shares. Cargill, Tyson and the USDA say the lean, finely textured beef is safe. The additive is treated with ammonium hydroxide, or sometimes citric acid, during its production to kill pathogens. Centrifuges separate the fat, yielding 94 percent to 97 percent lean meat, according to Beef Products Inc., the biggest producer. Burger King The additive may be part of as many as 20 billion meals each year, Dakota Dunes, South Dakota-based Beef Products says on its website. The product represents about 3 percent of U.S. beef supply, according to BMO Capital Markets. The debate surrounding LFTB isn’t new. McDonald’s Corp., the world’s largest fast food chain, and Burger King Holdings Inc. stopped serving burgers with the additive in 2011. Critics such as celebrity chef Jamie Oliver say the lean meat is unappetizing because it’s made of inferior cuts and is chemically treated. Scrutiny intensified in the last month after an online petition was started to have the product banned from the federal school lunch program. A March 7 ABC News television report questioned its use. Beef Products temporarily closed three plants and ground-beef maker AFA Foods sought bankruptcy court protection, citing media coverage. ‘Critical’ Period The USDA agreed last month to allow schools to choose the beef served in cafeterias following public pressure. The issue of LFTB reached “fever pitch,� Cargill said March 15. U.S. beef-processor margins are likely to stay negative at least through September because the industry’s problems have been “magnified� by the decline in the use of the lean meat, said Glynn Tonsor, assistant professor in the department of agricultural economics at Kansas State University in Manhattan. Lower LFTB use will increase costs as processors switch to more expensive cuts for ground beef, he said. U.S. beef supply is expected to drop 4.4 percent in 2012, the USDA said April 10. The weeks after Easter Sunday are “critical� for Tyson and its competitors as the U.S. grilling season -- loosely defined as the period between Memorial Day in May and Labor Day in September -- approaches, Stephens’s Aslam said. U.S. beef sales are highest during the week of July 4, followed by Labor Day and Memorial Day, according to the National Cattlemen’s Beef Association. During the week of the U.S. Independence Day holiday, Americans buy about $400 million of beef, 25 percent more than in an average week, with ground beef the top selling beef item, the industry group estimates. “We are hopeful that ground beef demand will rebound as the summer grilling season begins over the next several weeks,� said Martin, the Cargill spokesman. To contact the reporter on this story: Shruti Singh in Chicago at ssingh28@bloomberg.net To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

Source