Grain prices and poultry demand: Searching for the new norm

Poultry producers face the harrowing economic prospect that in July corn prices could be anywhere from $4 to $10 a bushel, largely depending on the weather during the next two months in the U.S. Corn Belt. Not an enviable business environment when animal feed ingredients account for a majority of the total cost of production, and when the range of possible cost is what would have once seemed unthinkable.

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Poultry producers face the harrowing economic prospect that in July corn prices could be anywhere from $4 to $10 a bushel, largely depending on the weather during the next two months in the U.S. Corn Belt. Not an enviable business environment when animal feed ingredients account for a majority of the total cost of production, and when the range of possible cost is what would have once seemed unthinkable.

Normalcy in the poultry business died in 2006, however, with the introduction of the U.S. Renewable Fuels Standard, which began the diversion of millions of acres of corn plantings to ethanol fuel production. Since then, with corn in short supply in the face of rising world demand and droughts in key corn producing regions of the world, animal feed grain prices have been high and volatile. The financial squeeze on poultry producers was made complete with the recessionary economy and slumping demand for poultry.

Grain and oilseed prices will be key factors in the financial performance of the industry in 2013, to put it mildly. Other factors include the strength of the U.S. economy, which largely depends on the rate of employment, and the level of U.S. poultry exports.

Will ending corn stocks rise in 2013?

Will there be the beginning of a rebuilding of grain stocks in 2013? Will corn prices moderate? The outlook varies with different analysts.

USDA’s February 8 forecast for the season-average farm price for corn was $6.75 to $7.65 per bushel. That’s based on a projection of 97.2 million acres being planted and a yield of 123.4 bushels per harvested acre.

Low corn stocks, which have helped drive up all animal feed ingredient prices, are in their third year of decline. Droughts in key grain-producing regions of the world in 2008, 2010, 2011 and 2012 have contributed to successive years of lower corn stocks, with USDA projecting an all-time low of 632 billion bushels at the end of the 2012-13 marketing year.

Risk related to grain stocks is under valuated

Tight grain supplies led Rabobank to warn in a recent Agri Commodity Monthly, “Agricultural markets appear to under valuate risk, with [grain and oilseed] stock levels reduced and production outlook uncertain, while price uncertainty has fallen to multi-year lows. Record-low levels leave grain and oilseed prices vulnerable to the upside and with the potential for intense volatility.”

Industry economist Dr. Thomas Elam, in fact, says rebuilding corn stocks in 2013 is a tall order. He told an audience at the National Turkey Federation convention, “A corn yield of at least 145 bushels an acre is needed this year just to keep prices relatively flat or down a little. In order to fulfill the 15 billion gallon [Renewable Fuel Standard] mandate for ethanol, to produce to meet the potential demand for meat and dairy products in this country, and to restore U.S. supply for export markets to about 2.2 billion bushels a year, we need corn crops of 95 million-plus acres at 165 bushels an acre in every year as far as the eye can see. That’s not going to happen. There is not the potential in corn agriculture to make it happen.”

Turnaround may come sooner, say some analysts

Other economists see the possibility of corn markets moderating in the nearer term. John Anderson, deputy chief economist, Farm Bureau Federation, said at the International Production and Processing Expo, “I have seen projections for corn planting of 99 million acres. I do not believe that many acres will be planted, but a lot of corn will be planted. If there is good corn production this year, there will be a dramatic turnaround in corn prices.”

Terry Barr, senior director of industry research at CoBank, also sees the possibility of a near-term reduction in grain prices. “Significant amounts of new production of coarse grains are beginning to come into the market, so inventories may be rebuilt faster than thought,” he told listeners at the International Poultry Scientific Forum.

Prepare for volatility in grain prices

Volatility in grain prices poses an even greater management challenge for poultry companies than the high prices. In the Poultry Q1 Quarterly, Rabobank advised, “The performance of poultry companies in 2013 will depend, to a large extent, on how well they are able to deal with volatility from grain and oilseed prices. Although the current outlook suggests a slowdown in feed price increases, uncertainty remains due to low stock levels and an uncertain production outlook for grains and oilseeds. The industry should therefore be prepared for any change in input prices.”

Elam shared corn price projections for three different corn yield scenarios — $7 a bushel at his baseline projection of 145 bushels per acre, $8 a bushel at a lower production of 130 bushels per acre, and $6 a bushel at a higher production of 155 bushels an acre. He totally discounted any possibility of a trend-line yield of 165 bushels due to the lack of soil moisture in the major corn-growing areas west of the Mississippi River.

“The price differences due to even minor changes in supply are significant,” he said, “because there are virtually no ending stocks of corn.”

The Rabobank report echoed Elam’s point about corn price sensitivity: “Feed cost remains the wild card for 2013. The current outlook is fragile due to low [feed grain] inventory levels, but output from South America looks set to recover.”

Poultry producers, however, should not depend on the feed ingredient markets to improve. “The message to the poultry industry is that hope is not a good strategy to address volatile feed costs. Producers need to take aggressive risk management strategies with regard to pricing.”

Consumer demand for meat and poultry

High grain prices are not the only issue facing poultry producers in 2013. Meat and poultry production and disappearance is down, and there are questions about consumer demand at higher prices.

Record retail meat prices appear to be meeting consumer resistance, Anderson said, and higher prices exacerbate the problem of stagnant income for U.S. consumers.

“Real meat prices have outpaced increases in personal disposable income,” he said. “That has important implications for the meat sector as we look ahead and think about how consumers deal with these higher prices. As consumers economize in their household budgets, this is a real demand challenge for the meat sector. This is coming at a time when consumers are not in a good position to deal with the higher prices.

“That challenge is evident in the U.S. per capita meat consumption figures, which have dropped dramatically. This does not necessarily say anything about real demand for meat and poultry. The consumption numbers have more to do with the amount of product available. One must dig a little deeper to determine whether the demand is strong or weak.”

Price advantage for poultry as costs escalate

The poultry industry is better positioned than its red-meat competitors to meet the consumer resistance to higher prices, according to Rabobank. The poultry industry’s pricing power should improve, it said, with continuing high prices for competitor meats such as pork and beef leading consumers to choose the cheaper poultry option.

Positive but fragile poultry outlook calls for production restraint

The poultry industry continues to operate in a challenging market place, but conditions for 2013 are improving, said Rabobank analyst Nan-Dirk Mulder.

“Despite the positive picture, this outlook is very fragile and dependent upon risks related to feed costs and supply discipline,” he said. “As grain and soybean stocks remain low, supply discipline will be a key tool for the industry to maintain margins. This has been demonstrated in Brazil where production cutbacks have paid off in improved margins.”

Although the current outlook suggests a slowdown in animal feed price increases, Rabobank concluded, uncertainty remains due to low stock levels and an uncertain outlook for grains and oilseeds. The industry should therefore be prepared for any change in input prices.

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