Tyson Foods: Can One of the World’s Largest Food Companies Break a Destructive Cycle?
Tyson Foods’ supply chain is under pressure – are they doing enough to control costs and drive innovation?
Tyson Foods is the largest producer of meats in the United States [1], and one of the largest in the world, with $37 billion in sales in 2016. Tyson produces one in five pounds of chicken, beef, and pork in the U.S., and processes approximately 35 million chickens, 125 thousand cows, and 415 thousand pigs per week. In 2016, 3,659 farmers raised chickens for Tyson, 3,764 feeders and ranchers sold them cattle, and 1,975 farmers sold them pigs [2][3]. Tyson’s supply chain is tremendously large and complex, and is currently exposed to significant risk due to the potential effects of climate change.
Emissions levels of environmentally harmful greenhouse gases (“GHG”) – namely carbon dioxide, methane, and nitrous oxide – are under extreme scrutiny across the globe. The livestock sector is one of the primary culprits; GHG emissions associated with livestock supply chains (e.g., manure, digestion processes, and feedstock production) contribute 14.5% of human-caused GHG releases, trailing only the energy sector [4]. One of the many side effects of a warming planet is an increase in the frequency and severity of extreme weather, including droughts. Climate change increases the odds of worsening droughts in many parts of the U.S. due to drier soil [5] as well as extended recovery times when droughts do occur [6].
These dynamics create a challenging environment for Tyson: they are a leading contributor to GHG emissions and climate change, yet face significant financial and operational pressures from its effects. They must find efficient ways to provide sufficient food and water for livestock while also complying with costly emissions initiatives. Extreme weather and drought could lead to increased volatility in the global supply and price of commodities like maize and wheat, both critical inputs for feeding livestock. The 2012 U.S. drought, as an example, carried an associated cost of approximately $30 billion and produced a scarcity of corn that led to increases in global food prices by as much as 10%[7][8]. Global agriculture is also the world’s largest consumer of fresh water, a scarce resource with increasing competition for access. Rising temperatures may increase animal water consumption by a factor of two to three, and create the need to produce crops and create livestock systems that demand less water or are geographically better situated for cost-efficient access. [9]
Tyson faces potentially significant, sustained increases in costs due to greater use and scarcity of water and increased pressure on its supply chain, as well as the risk of short-term pricing volatility due to unpredictable weather and severe climatic events. The company has taken several actions to get ahead of these issues:
- In May 2017, Tyson announced a collaboration with World Resources Institute to develop industry-leading GHG targets and water conservation targets for its operations as well as its supply chain. [10]
- Tyson launched Tyson New Ventures, a venture capital fund with $150 million in capital, to invest in alternative proteins, profitable methods of eliminating food loss, and technologies that drive efficient resource allocation throughout the food chain. Its first investment was a minority stake in Beyond Meat, a producer of soy-based alternatives to meat. Tyson was the first major meat producer to invest in an alternative protein business. [11]
- Tyson has committed to investing in operating plants that are more efficient in processing meats (e.g., an announced plant in the U.S. Midwest that will lower transportation costs of feed and house “hatch-to-slaughter” operations in one plant). [12]
It is critical that Tyson identifies emerging risks due to climate change and conducts scenario analyses while improving resource allocation and rationalizing transportation costs. Investing in more efficient plants should have positive near-term results, but establishing emissions targets and executing small venture capital investments have much longer lead times and do not have clear, measurable impact. Tyson’s management should become a partner in providing funding for innovations to increase crop yield, and should also become proactive in finding alternative uses for the waste produced in its operations. Tyson’s business is becoming more expensive, and while they have taken some measures to adapt to change, are they doing enough?
Will the Beyond Meat acquisition alleviate some of Tyson’s increasing operational pressure or is it simply a hedge for changing consumer tastes? Is there a way that Tyson can join the battle in increasing water efficiency in the supply chain, and is it their responsibility to improve the efficiency of their suppliers? Cow manure has become an input for clean energy in some markets – is this a potential revenue stream for Tyson and its suppliers? [13]
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[1] D’Costa, V. (2017). Meat, Beef & Poultry Processing in the US. p.4.
[2] Ir.tyson.com. (2017). Tyson Foods Inc. – Investors – Investor Overview – Tyson Fact book. [online] Available at: http://ir.tyson.com/investor-relations/investor-overview/tyson-factbook/default.aspx [Accessed 14 Nov. 2017].
[3] Tysonfoods.com. (2017). About Tyson. [online] Available at: http://www.tysonfoods.com/sitecore/content/sustainability2016/home/about%20tyson%20foods [Accessed 14 Nov. 2017].
[4] Fao.org. (2017). Major cuts of greenhouse gas emissions from livestock within reach. [online] Available at: http://www.fao.org/news/story/en/item/197608/icode/ [Accessed 14 Nov. 2017].
[5] Miskus, D. (2017). Drought and Climate Change — Center for Climate and Energy Solutions. [online] Center for Climate and Energy Solutions. Available at: https://www.c2es.org/content/drought-and-climate-change/ [Accessed 14 Nov. 2017].
[6] Good, A. and McGlinchey, D. (2017). Study finds drought recoveries taking longer. [online] Climate Change: Vital Signs of the Planet. Available at: https://climate.nasa.gov/news/2617/study-finds-drought-recoveries-taking-longer/ [Accessed 14 Nov. 2017].
[7] Gledhill, R., Hamza-Goodacre, D. and Ping Low, L. (2013). Business-not-as-usual: Tackling the impact of climate change on supply chain risk. PwC, pp.5-8.
[8] Ncdc.noaa.gov. (2013). NCDC Releases 2012 Billion-Dollar Weather and Climate Disasters Information | National Centers for Environmental Information (NCEI) formerly known as National Climatic Data Center (NCDC). [online] Available at: https://www.ncdc.noaa.gov/news/ncdc-releases-2012-billion-dollar-weather-and-climate-disasters-information [Accessed 14 Nov. 2017].
[9] Rojas-Downing, M., Nejadhashemi, A., Harrigan, T. and Woznicki, S. (2017). Climate change and livestock: Impacts, adaptation, and mitigation. East Lansing, MI: Michigan State University, Department of Biosystems and Agricultural Engineering, pp.147-148.
[10] Ir.tyson.com. (2017). Tyson Foods Teams with World Resources Institute on Industry Leading Environmental Goals for its Supply Chain. [online] Available at: http://ir.tyson.com/investor-relations/news-releases/news-releases-details/2017/Tyson-Foods-Teams-with-World-Resources-Institute-on-Industry-Leading-Environmental-Goals-for-its-Supply-Chain/default.aspx [Accessed 14 Nov. 2017].
[11] Tysonfoods.com. (2017). Tyson Foods: Tyson New Ventures. [online] Available at: http://www.tysonfoods.com/our-story/tyson-new-ventures [Accessed 14 Nov. 2017].
[12] Tysonfoods.com. (2017). Strong Chicken Demand Prompts Tyson Foods To Expand Production. [online] Available at: http://www.tysonfoods.com/media/news-releases/2017/09/strong-chicken-demand-prompts-tyson-foods-to-expand-production [Accessed 14 Nov. 2017].
[13] Erbentraut, J. (2015). Farmers Are Generating Renewable Energy And Making Money — Thanks To Cow Poop. [online] HuffPost UK. Available at: https://www.huffingtonpost.com/entry/cow-manure-renewable-energy-anaerobic-digesters_us_55c8f450e4b0f1cbf1e5d38c [Accessed 14 Nov. 2017].
Jared,
I believe Tyson Foods is indeed in a bad place. The meat industry is publicly pointed at as one of the leading contributors to global warming, and consumers are stepping away “en masse” from animal to vegetal proteins. As you correctly point out, it is at the same time also one of the industries that is directly affected by climate change through rising costs. The combination of these two factors lead me to believe that the whole meat industry, and especially its leading actors, are about to lose a significant share of their business to plant-based foods. In this context, their investment in Impossible Foods is an interesting route, yet also a very puzzling one to me. It looks like a desperate hedge for the future, compensating for management’s lack of inspiration to structurally fix their business’ (long-term) problems.
Great article Jared. I don’t necessarily agree with the comment above. On one hand, as FD points out, the acquisition of Beyond Meat and the remainder of the $150 million venture capital fund may not be in the best interests of Tyson Foods’ shareholders. From a capital allocation perspective, the $150 million VC fund has a completely different risk/reward profile than the rest of the company. On the other hand though, a comparison can be made to traditional oil and gas companies such as Exxon Mobil investing in renewable energy projects. Exxon currently spends over $1 billion per year in renewable energy projects, such as the development of an algae that can be used as biofuel. Traditional companies like Tyson and Exxon have the resources available to make great progress in their fields, and investments in these technologies today could transform their companies in years to come.
Jared, thank you for this interesting article on a highly relevant topic. I react to the Beyond Meat investment in a much more cynical way than FD or DM. As Jared mentioned, Tyson is a leading contributor to GHG emissions – a fact that has received much media attention. Advocates trying to raise awareness about the implications of climate change have written articles and created documentaries that have somewhat villainized large meat producers.
Therefore, I see this minority investment and the VC fund in general largely as a self-serving PR move to drum up positive public sentiment. For a company that boasts almost $40bn in sales, a $150mm fund seems incredibly small and does not signal a real commitment to investing in “alternative proteins, profitable methods of eliminating food loss, and technologies that drive efficient resource allocation throughout the food chain.” Furthermore, at the time of Tyson’s minority investment, Beyond Meat has already received funding from philanthropic-minded Bill Gates. [1] Gates saw an application in which this technology could be used to help provide affordable protein to developing countries that still struggled with malnourishment. I think Tyson saw an opportunity to invest in a company that was already being lauded for its socially conscious mission to make themselves appear committed to addressing climate change.
While DM could be correct in his assessment that plant-based meat substitutes have the potential to transform Tyson in the long term, I find it suspect that they have only made a single minority investment in this space. There are a number of companies with products similar to Beyond Meat, such as Impossible Foods or Exo Protein. Therefore, I would assume if expanding into these new plant-based technology was a strategic priority for Tyson, they would pursue further investments in this space (or even an acquisition) in addition to Beyond Meat. [2]
[1] http://www.businessinsider.com/how-a-startup-that-makes-fake-meat-from-plants-caught-the-attention-of-bill-gates-and-the-founders-of-twitter-2015-7
[2] https://www.digitaltrends.com/features/the-future-of-food-meat-alternatives/
I love this article, Jared. I commend you for picking a topic that stares the issue of climate change so directly in the eyes as the topic of the meat industry. If I could, I’d like to take this topic a level higher to explain why I am as cynical as Megan is about Tyson.
According to scientific research and backed by recommendations by the Food and Nutrition Board, Americans should consume between 46 and 56 grams of protein per day. However, the average American currently consumes 70 – 102 grams per day. [1] In fact, many intelligent consumers are tricked into believing that they need to increase their protein intake in order to be healthy. My own father drinks a whey protein shake every morning, even though his daily consumption of fish, chicken, and legumes is enough to provide him with sufficient protein, even with his dedication to exercise.
This high level of protein consumption is due largely to lobbying efforts by the meat industry, including Tyson. Despite strong scientific evidence that reduction in red meat consumption reduces risk of cancer, heart disease, and contribution to climate change, the latest revisions of the Dietary Guidelines for Americans failed to mention any recommendations to reduce red meat consumption. [2,3]
Thus, despite Tyson’s efforts conserve water, reduce GHG contributions, and invest in alternative protein sources, Tyson is a major contributor to their own problem. I agree with Megan that the $150M investment in Beyond Meat is measly at best. The fact is that truly mitigating the impact of their operations on the climate would require people to eat less meat, and Tyson simply won’t allow that to happen to their bottom line.
[1] https://www.huffingtonpost.com/jessica-jones-ms-rd/protein-diet_b_1882372.html
[2] https://ourworld.unu.edu/en/eating-less-meat-essential-to-curb-climate-change-says-report
[3] https://www.theverge.com/2016/1/7/10726606/2015-us-dietary-guidelines-meat-and-soda-lobbying-power
I very much agree with Megan. I think the investment in Beyond Meat is driven much more by the growing sales of meat alternatives driven by consumer tastes than an altruistic view of the environment. Tyson, like many other large consumer food companies, are heavily invested in products that are stagnant in demand and are seeking new pockets of growth. While I don’t see traditional meats going away any time soon, as the US is a developed country in terms of food consumption, the likely area of high growth is only meat alternatives. Additionally, I think it will take much more than a small acquisition to transform Tyson’s business in the long-run as it accounts for such a small portion of the portfolio. If anything, it will help Tyson learn about alternative meats first hand, but will doubtful transform their supply chain. On the positive side, as consumers become more conscious of the environmental impact of their behavior, their demand, I do believe, will flow back to corporations. The unfortunate thing is that may be too late after the impact has been made.