High Feed Costs Gobble Up Poultry Industry Profits

Poultry IndustrySome poultry processors may have less to be thankful for this Thanksgiving — less money that is. Record high feed prices, typically the largest expense for processors, are eating into poultry profits margins. Corn prices hit all-time highs in summer 2011 and are expected to remain high into 2012.

The excess supply of poultry products is also creating challenges. While consumer demand for poultry has slipped, production has increased in 2011. The glut of poultry meat in the market is suppressing retail prices, making it difficult for processors to cover rising production costs. The US Department of Agriculture stepped up to lend aid in August, buying $40 million in chicken products, but the purchase has offered little relief. Both big industry players and smaller family-owned businesses are struggling.

Industry giant Pilgrim’s Pride recently announced that it lost $162.5 million, or 76 cents per share, in third quarter 2011, marking the third straight quarterly loss for the company. So far, Pilgrim’s Pride’s losses for the year total $400 million. Rival Sanderson Farms posted a $56 million loss in its fiscal third quarter, marking the third consecutive quarterly loss for Sanderson as well. Tyson Foods, which has remained profitable for most of 2011, now says its poultry division will likely be pushed into the red.

More than 40 vertically integrated poultry processors have struggled financially over the past year, according to industry insiders. At least four processors have declared bankruptcy in the last 10 months, including family-run Townsends and Allen Family Foods. Both companies were bought by foreign firms, a trend that is gaining momentum as smaller processors struggle to turn a profit.

Despite the excess supply of poultry meat in the marketplace some bigger processors do not plan to cut production levels in 2012. Pilgrim’s Pride expects to keep volume the same; Sanderson Farms has said it will increase output by 3 percent. While this may seem surprising, apparently it is not unusual in the poultry business. “Processors have a tradition of not slowing output, even if they’re losing money, to try and drive competitors out of business. That’s helped to fuel the boom-and-bust cycles the industry has traditionally faced,” according to The Wall Street Journal. Smaller companies, however, may have no choice but to cut production.

One way large processors are trying to combat dwindling margins is by changing contract lengths with grocery stores and restaurants. As poultry businesses enter negotiations with customers, many are less likely to agree to 12-month contracts. Short-term agreements, such as six month and quarterly contracts, and flexible contracts, are becoming more common. The flexibility will allow processors to adjust to volatile corn and soybean prices. As the poultry industry becomes more concentrated, grocers and restaurants may be forced to accept the new shorter contracts.

Although flexible contracts could benefit processors in the year ahead, contract changes will not rebound profits for 2011. Strong foreign demand for poultry and access to new overseas markets could also offer some relief in 2012. However, the key to industry growth over the next year is lower feed prices and higher domestic demand. Corn prices are predicted to remain high in 2012, but then grain price swings are common. It’s possible by next Thanksgiving the poultry industry could be in a completely different state.

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Photo by tuchodi, used under a Creative Commons license.

Rebecca Mallett

Rebecca Mallett has been researching and writing about companies, industries, and executives as a member of the Hoover’s editorial team since 2007. For the past 5 years, she has focused on the agriculture and food manufacturing, business services, and mining and energy industries as a member of the First Research team. Follow her on Twitter.

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