Harrington's Sort & Cull

The Packing House Labor Squeeze

John Harrington
By  John Harrington , DTN Livestock Analyst

Some people are almost impossible to please. Take those insatiable investors and analysts who endlessly pound the pavement of Wall Street in search of perfect corporate performance.

For example, even though Tyson Foods just reported a 7.6% increase in sales for the food giant's second quarter, enough to generate profits of $315 million, the cantankerous "what-have-you-done-for-me-lately" crowd was not happy.

Granted, Tyson's take was down $35 million from the same period last year. Yet company accountants insisted that earnings per share on an adjusted basis actually increased (i.e., $1.27 versus $1.01).

The deacons of disappointment were ready for that spin as well. Analysts polled by Thomson Reuters were expecting adjusted earnings of $1.30 a share.

Yet in the conference call that followed, it became clear Tyson executives knew the standard drill with market reporters quite well.

Chief Executive Tom Hayes quickly began to croon the old classic "accentuate the positive (e.g., beef revenue up 5.6%; beef exports up 22%) eliminate the negative (e.g., "Winter weather was a challenge in our pork segment as well creating staffing difficulties and at times also preventing us from running some of our plants"), and don't mess with Mr. In-between (i.e., rising labor and transportation costs).

I thought the post-mortem was as smooth as these things go, but the elephant in the room (briefly identified, though definitely kept at a safe distance) was left trumpeting when all callers left the line. Specifically, the stubborn problem of increasing labor expense (the freight challenge is essentially one of labor) was pretty much unaddressed.

Of course, that wasn't terribly surprising. Short of humanless facilities filled with wall-to-wall robotics, no one has a good answer to the critical shortage of packing house workers.

The stressed HRI department at Tyson has plenty of hair-pulling company across the industry. In the wake of the mini—strike at the Schuyler beef plant several weeks ago, Cargill Director of Communications Mike Martin admitted that the company was currently trying to fill hundreds of open positions across their Nebraska based plants.

Martin's comment strikes me typical of comments heard from packers with long-established plants. Not only is the available labor pool relatively shallow (the national unemployment rate was just reported at 3.9%, the lowest since 2000), the turnover rate is extremely high (i.e., thanks to jobs that are physically demanding, highly skilled, and relatively dangerous).

For those intrepid processors that are expanding with brand new facilities, fielding a competent and dependable labor force is even more daunting. Just ask frustrated managers at Seaboard and Clemens who now, after opening new plants over the last year, face an ongoing struggle to maintain work forces necessary to perpetuate efficient chain speed.

Indeed, the new Seaboard Triumph hog facility at Sioux City has announced plans to launch a second shift (i.e., 10,000 hogs plus, requiring another 900 jobs) sometime summer, assuming that enough workers can be found for the expansion.

Compounding the labor shortage even more, Prestage Farm is now building yet another large work station in north central Iowa. As many as 1,000 willing workers will need to be found in order to kill and process another 10,000 barrows and gilts on a daily basis.

The elephant in the room mentioned earlier is awkward not only because he dominates such a serious shortage of chairs. The more troublesome aspect of his presence may be it points to the national quagmire surrounding immigration.

Needless to say, meat processors in this country are highly dependent on foreign workers. Many are employed legally, but it's likely that many have green cards hot off the press at Staples.

Here's how Kent Pruismann, past president of Iowa Cattlemen's Association recently put it: "If we exported or deported all the illegal immigrants in Sioux County, Iowa, our economy would collapse, plain and simple. There's no question about it."

It makes me wonder if it's not in the best interest of the meat industry at large to lobby for some practical changes in immigration policy, supporting ideas that are more economically sensible that wall-building and mass deportation.

Beyond the resolution of this thorny issue lies the classical test question on the Econ 101 final: How can the labor pool be significantly expanded?

The answer "raise wages" is the only one that can avoid the professor's red pencil.

Judging by the size of his office at Tyson headquarters in Springdale, Arkansas, I think it's safe to assume that CEO Hayes has a few more courses beyond Econ 101 under his belt, enough learning to command a laser focus on acceptable corporate margins. One way or another, he and his disciplined team will do what it takes to address the rising cost of labor.

Earlier this year, Hayes put his problem-solving mandate succinctly: "These higher costs are included in our overall outlook. We're assuming we'll recover the majority of these costs through higher pricing."

In a nutshell, the head honcho of the world's second largest processor and marketer of chicken, beef, and pork went on to say that passing the cost through is something they have to do and ultimately, the consumer is going to pay for it at some point.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow him on Twitter @feelofthemarket

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