US meat giant Tyson Foods has expressed confidence it can push through the higher grain costs it expects to incur after the severe drought in the country.

President and CEO Donnie Smith said Tyson’s commodity bill was “covered” until the end of September but insisted the company would “definitely” need to increase prices to cover a spike in feed costs later in the year as it felt the effect of rising corn and soybean costs.

Speaking after Tyson filed its third-quarter results, Smith said the drought would “pressure earnings” in its next financial year. However, he said Tyson still expected “solid” profits next year and said price increases would support the company’s profitability.

COO Jim Lochner said the nature of Tyson’s contracts would help the company push through higher costs.

“Over the past couple of years, we have substantially reduced the number of fixed-price contracts we have with customers and currently have less than 15% of our poultry volume in annual fixed-price contracts,” Lochner told analysts. “The vast majority of our contracts are tied to specific markets or allow for conversations above adjusting prices to move prices to offset higher inputs. And we will continue to push for even more of these types of contracts.”

A spike in the cost of corn and soybeans, two of the main elements of animal feed, was also likely to see the US meat sector scale back production, Lochner explained. “I believe the supply will begin to rationalise as well, making it easier for us to have those pricing conversations,” Lochner said.

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By GlobalData

Tyson, however, insisted it would stick to its current production plan after a year in which it cut output 6-8%. “Now, things may change depending on what grain does or something like that. But currently, we don’t have any plans to change our production because we’re producing well below our demand today,” Smith said.

The comments from Tyson were keenly watched given its presence in a number meat sectors and government forecasts that retail prices could rise across categories next year.

Two weeks ago, the US Department of Agriculture said the drought could lead to higher retail prices for beef, pork, poultry, and dairy products “later this year and into 2013”.

The warning from the USDA prompted headlines across the media. Tyson’s Lochner said media coverage of the issue could mean consumers are better prepared for the prospect of higher prices.

“One interesting thing that’s going on this year with the drought, there’s been so much communication out in the popular press about expecting higher prices because of a reduced corn crop. And so I do think that at least we’ll start to see some acceptance and maybe a little less demand destruction,” Lochner said.