Fitch: Strong U.S. Consumer Demand Fuels Stable U.S. Agribusiness Outlook Despite Shocks.

Business Editors

CHICAGO--(BUSINESS WIRE)--March 4, 2004

Initial findings of bovine spongiform encephalopathy (BSE, or mad cow disease) and avian influenza (AI) in the U.S. clouded over an otherwise Stable Outlook for the U.S. agribusiness sector, according to a special report by Fitch Ratings. However, diverse earnings streams, along with consumers' general confidence in the U.S. food supply and their desire to increase their protein intake in light of the popular Atkins and South Beach diets, eased the impact of these developments.

The first U.S. case of BSE in December of last year raised a great deal of uncertainty for beef processors such as Cargill, Tyson and Swift & Co., while poultry processors such as Tyson and Pilgrim's Pride also face questions over the recent discovery of a high pathogenic strain of AI in Texas. "Various issues that Fitch has addressed with respect to these outbreaks are whether they are isolated cases, whether current regulations are sufficient to protect consumers, and most importantly, consumer reaction to these developments," said Wesley Moultrie, Senior Director, Fitch Ratings.

Diversification of earnings streams and solid U.S. consumer demand have partially mitigated the impact of reduced exports. Thus, Fitch does not expect to take any rating actions as a direct result of these events. Cargill, the largest agricultural processor, is diversified across the entire sector and Tyson, the largest meat processor, has substantial diversification within the meat proteins. These attributes in part, mitigate the agricultural shocks and so far has protected their earnings trends.

The first step toward re-opening export markets for U.S. beef came earlier this week, when Mexico, the second largest destination for U.S. beef exports, agreed to reopen its border to exports of U.S. boneless beef from cattle less than 30 months of age. This action should help support beef prices in the coming months as supply increases.

Agribusiness industry consolidation may slow down in 2004, with acquisitions likely to be limited to smaller tack-on additions to expand operations in quickly growing agribusiness regions like South America and Asia. High leverage from prior years' acquisition activities led to Negative Rating Outlooks for Tyson and Archer Daniels Midland. "However, Tyson's has paid down a significant amount of debt and the company's Outlook could be revised to Stable in 2004 if the jury recommendation for damages in the cattle producers' class action is set aside or substantially reduced and the company's operating earnings remain stable. Fitch will also evaluate ADM's Negative Outlook during 2004. The company's high short-term debt to finance hedged commodity inventories has caused a distortion to ADM's credit metrics on an unadjusted basis. However, when adjusted for incremental debt to finance such inventories, the company's overall credit profile shows improvement," said Moultrie.

In other subsectors of U.S. agribusiness, Fitch expects wheat, corn and soybean prices to remain elevated for much of 2004. All of these commodities are substantially above their five year averages, with soybeans over 50% above the average. Demand for corn-based products in the U.S. may see record highs, supported largely by ethanol production and animal feed if protein demand remains strong.

Higher agricultural commodities prices also results in higher ingredients cost for packaged food companies, which may negatively impact operating margins and earnings trends and could lead to higher food price inflation for the consumer.