Tyson Chokes the Chicken Market

Pilgrim's Pride, the worst-off producer in a horrific poultry market, has filed for Chapter 11 bankruptcy.

Did rival Tyson Foods purposely push Pilgrim's over the precipice? Quite possibly.

Tyson is the No. 2 chicken producer, behind Pilgrim's. Unlike Pilgrim's, however, Tyson also does huge business in other meats. It is the country's largest beef packer and is No. 2 in pork. And it's earning decent profits in both markets.

But like everyone else, it's losing big in chicken. Feed costs have soared, while an oversupply problem has pushed down retail prices. Tyson last month reported a loss of $91 million in its chicken business for the fourth quarter.

Tyson CEO Richard Bond told analysts at the time that the company wasn't about to cut back on production. "As of right now," he said, "we still believe that the demand-supply balance for us is still reasonably good."

Which is ridiculous. Every independent observer of the poultry business says there is a massive oversupply problem, which is keeping retail prices way down, and which was the proximate cause of the losses in Tyson's poultry business.

"Something weird is happening in the meat industry," observed Tom Philpott of the Gristmill blog, noting that Tyson not only didn't cut back, but actually increased chicken production in the quarter by 6 percent.

And, Philpott noted, Barclays Capital analyst Christopher Bledsoe came out and said that Tyson was trying to "force other chicken processors to carry a disproportionate burden of this cycle's necessary production cuts."

He didn't come out and say, however, that Tyson was trying to squeeze the life out of Pilgrim's Pride.

"You see," Philpott write, "while Tyson can, at least partially, offset losses in its poultry business with pork and beef profits, Pilgrim's Pride is a pure chicken company."

Despite its losses on chicken, Tyson earned $48 million in the fourth quarter. Meanwhile, Pilgrim's was struggling just to stay afloat, missing bond payments, and, now, declaring bankruptcy.

Not that Pilgrim's hasn't made plenty of mistakes of its own. The company bought rival Gold Kist a couple of years ago for $1 billion -- not only taking on a huge debt load, but also exposing itself yet more to a chicken market that was about to go into a tailspin.

Next: Expect Tyson to step in and offer bargain-basement prices for the assets that Pilgrim's will have to sell off. And expect it to be able to wield even more power in the chicken market. Just four companies (Perdue and Sanderson are the other two) control nearly 60 percent of the market, which makes for an oligopoly. The firms can pretty much set the prices it will pay farmers for chickens.

But Tyson's power play does not come without risk. Analysts, noting the company's falling stock price and recent downgrading of its bonds, recoiled at Bond's supply strategy.

But they're thinking in the short term, and Bond is thinking in the long term. He's willing to take big losses in the chicken business now in order to exert much more leverage when the retail market turns around. The question is when that will happen.

Pilgrim's is seeking $450 million in financing to reorganize. It has assets worth $3.75 billion and debts totaling $2.72 billion. Its operations will continue, it said in its bankruptcy filing.