Sequester Affects Meat Giants

The meat industry, which hit a two year high in exports to Japan last week, apprehends a huge loss when inspectors are furloughed by the U.S. Agriculture Department (USDA), according to the proposed budget of the U.S. government in March 2013.

The spending cut and tax increases to cover the deficit by the U.S. government was scheduled to begin in Jan 2013, but was eventually pushed back to Mar 2013. This was because the differences between President Obama and congressional Republicans were still to be resolved.

Up to one-third of the workers appointed by the U.S. Agriculture Department could be laid off as a cost-cutting measure by the U.S. government.

If that happens, it will lead to a two-week shutdown of plants owned by meat processing giants like Tyson Foods Inc. ( TSN - Analyst Report ) and Sanderson Farms Inc. ( SAFM - Snapshot Report ) . By law, meat processors cannot sell beef, pork, lamb and poultry meat without the USDA inspection seal.

According to Agriculture Secretary Tom Vilsack, the impact of the furlough of inspection personnel may amount to 15 days of lost production costing over $10 billion. However, Vilsack has assured meat processing giants that they will not have to shut down the plants very soon. That is on account of the inspectors being allowed 30 to as many as 120 days, or four months’ notice of layoffs.

The move to furlough the nation’s federal meat, poultry and egg products inspectors by the USDA as a measure of sequestration has been condemned by several organizations. The National Chicken Council requested the USDA to consider the decision once again as the shutdown of meat plants will negatively affect schools and other public institutions that rely on contracted-for meat and poultry products.

Sanderson Farms apprehends a huge loss during the 15-day furlough of inspection personnel and consequent shutdown of plants. The company also said that live chickens would suffer from higher mortality. The mortality would occur when chickens gained weight as a result of the company postponing chicken processing, which would in turn affect supply to grocery chains like Supervalu Inc. ( SVU - Analyst Report ) and Kroger Company ( KR - Analyst Report ) .

Tyson Foods, however, said that it is monitoring the proceedings regarding the budget cut and that it would stay away from any speculation in the interim period.

Currently both Tyson Foods and Sanderson Farms carry a Zacks Rank #1 (Strong Buy).