As we went to press, the early Christmas shopping reports indicated consumers were spending freely. They still were looking for bargains, which retailers were forced to deliver, but traffic in the stores looked good, as did overall profitability.
Christmas shopping season, however, brought some disappointing financial reports from food companies, especially from the animal protein markets. Tyson reported an operating loss of $77 million compared to income of $745 million a year earlier. "The best thing I can say about fiscal 2006 is it's over," said Richard Bond, president/CEO. Profits fell at Smithfield Foods. And, as we report on our news pages this month, Pilgrim's Pride and Gold Kist are merging. Call it consolidation after both suffered 2006 fiscal year losses. Kraft and Sara Lee continue to struggle through reorganizations.
On the other hand, Heinz stock reached a 7 1/2-year high after a surprisingly strong second quarter (ending Nov. 1), and the company raised its earnings projections for its fiscal year. ConAgra's income from continuing operations was up 50 percent for its second quarter, ending Nov. 26 (admittedly that comes after a lousy first quarter). In fact, all the large-cap food stocks, aside from Campbell Soup and Hershey, were up in the third quarter.
Bad economic years are pretty easy to spot. Good ones seem to be relative. While not everyone in the food industry enjoyed every minute of the ride, the U.S. economy just completed three years of good economic growth. At least four important things happened during 2006: the start of a long-overdue decline in the U.S. dollar, a return to "normal" interest rates (neither ridiculously low nor inflationary high), improvements in employment and a stock market that looked beyond energy prices (and artificially high housing starts) to hit new records.
All those things bode well for consumers in the long run, and what bodes well for consumers bodes well for the food industry. People are feeling secure, expressing some optimism about the economy and, as at least the early Christmas shopping reports indicated, they had money to spend.
Now, let us offer some optimism and good news from our own survey.
We cover a lot of ground in our annual Manufacturing Trends Survey. In addition to the "what keeps you awake at night" questions, 75 percent of the 232 respondents say they plan on increasing production by at least 5 percent this year. In fact, 26.6 percent predict throughput will be up by more than 20 percent.
In another question, 55 percent report their capital spending budgets have been increased for the year. Similar to the production question, the largest group, 28.1 percent, have a capital budget that's more than 10 percent over last year's budget. "2006 was a huge capital project year for us," wrote one respondent. "In 2007 we must optimize the projects that we installed this year."
Can the nation's underlying economic conditions sustain one more year of solid growth? The Wachovia Economic Group predicts 2007 will be the year of the "slightly tipsy, slightly bumpy, soft landing." From Standard & Poor's Equity Research Services: "We believe 2007 will be a good year, not as good as 2006, but one strong enough to provide investors with a 10 percent total return." S&P expects the primary drivers for the anticipated return to be economic expansion led by investments rather than housing and consumer spending; continued corporate earnings growth, driven by expanded international sales and a weak U.S. dollar; as well as currently attractive valuations for the broad U.S. markets.
In early December, the dollar hit a 20-month low against the euro and 14-year low against the pound. A softening dollar should immensely help exports of U.S. firms, and increasingly exports include food and beverages.
Many, but not all, economists are predicting an interest rate cut by the Federal Reserve in 2007, the first cut after 17 consecutive increases in the prime rate over the past two years.
Will 2007 be a winner or a wiener? Only time - the next 12 months, to be precise - will tell. But food companies need to keep the optimism level high, to keep investing in new product development and the plants to build those products, if they want to make 2007 a winner.
