'Pink slime' squeeze

CHICAGO - 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. ahead of the beef industry's peak sales period.

Kroger Co., 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. said it would offer customers meat without the additive.

Lower demand for the product -- dubbed "pink slime" by critics -- has prompted Minnetonka-based 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 win back shoppers' confidence ahead of the U.S. summer grilling season.

"If demand remains lackluster, it will impact beef processors' profitability," said Farha Aslam, an analyst at Stephens Inc. in New York.

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 show.

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 United States 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 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, Ark.-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.

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 fell 0.4 percent to $18.03 at the close in New York. It has dropped 13 percent this year while the Standard and Poor's 500 consumer staples index has climbed 4.8 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. While Tyson doesn't make the product, it sells trimmings to processors who do.

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.

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.