Will inflation be transitory or is it here to stay? Whether simply a blip or longer lasting, rising costs are already squeezing producer margins in the poultry and other industries.
In the U.S., for example, the consumer price index reached 6.2% in November last year – its highest rate since November 1990, and the cost of a Thanksgiving dinner in the country, according to a survey by the American Farm Bureau Federation, was 14% higher last year.
In the U.K., October’s rate of inflation reached its highest level in 10 years, while in Spain, costs were rising in the same month at their highest level since 1992.
The poultry industry has not escaped this upward prices tend, although not all markets are being hit the same way. Rising feed and fuel prices are having a widespread impact and, like other industries, poultry companies have had to shoulder numerous additional expenses as a result of COVID-19. Staffing costs have risen not only within the industry, but also in allied sectors. In some cases, these have been record-breaking.
All of these factors are increasing the cost of production. To a degree, some costs can be addressed through investment and more efficient working practices, but such changes take time. In the shorter term, retailers will need to be convinced to pass these costs onto consumers if businesses are to remain profitable. There are, however, limits, and some poultry producers have already cut output as a direct result of rising input costs, as there is only so much higher-priced product their markets can absorb.
The example of Tyson
In its fourth quarter report released mid-November, U.S.-based Tyson Foods, the world’s third-largest poultry producer, highlighted cost increases that are probably typical, to varying degrees, for most producers around the world.
Commenting on the business as a whole, the company notes that it incurred direct incremental expenses associated with the impact of COVID-19 totaling approximately US$65 million and US$335 million for its fourth quarter and 12 months of fiscal 2021, respectively.
These costs primarily related to staffing, and resulted from health and availability, the costs of personal protection equipment and production facility sanitization related to COVID-19.
While some of these costs will lessen as the pandemic wanes, others, the company notes, will become incremental over time.
Like others, the company has also had to work with raw material price increases and higher distribution and transport costs. Looking particularly at its chicken operations, the company notes that, during its fourth quarter, it suffered a US$325 million increase in feed costs.
Tyson CEO Donnie King is reported as saying: “Inflation has clearly had an impact on the business. As rates of inflation continue so will our pricing actions”.
Brazilian action on feed costs
Feed costs have been rising in numerous markets. In September, Ricardo Santin, president of industry association the Brazilian Association of Animal Protein (ABPA), noted that broiler production costs had risen 44% over the preceding 12 months, with feed making up a large part of that increase.
Government intervention brought speculation in the feed market to an end and, with forecast improved harvests, the industry was able to see light at the end of the tunnel where feed costs were concerned, he said.
Despite some relief from feed costs, Santin believes Brazil will have to undergo what he described as a rebalancing in the price of chicken. Producer margins had suffered he said, and while consumer prices had already risen they would need to rise further still.
End of an era in UK
Ongoing consumer prices increases are probably needed in numerous markets for businesses to remain profitable.
Commenting in October, Ranjit Singh Boparan, founder and president of 2 Sisters Food Group, the U.K.’s largest broiler producer and the sixth-largest broiler producer in Europe, said: “The days when you could feed a family of four with a GBP3.00 (US$4.05) chicken are coming to an end.”
He continued that feed costs had risen 15% while the cost of less visible commodities, such as feed supplements, litter and disinfectants, were 20% higher. Wages had increased 20%.
Where transport was concerned, he noted, the heavy goods vehicle driver shortage had sparked wage inflation in the transport sector that had been passed on, while fuel costs were at their highest since 2013.
In terms of energy, Boparan noted the company was facing energy commodity costs that were 450% to 550% higher than in 2019.
Pain in Spain
The Spanish poultry industry has said it is now in a critical state, with costs rising while its market has contracted. Prices paid by retailers have declined by double digits.
Spanish producers, like their counterparts in other countries, have shouldered the costs of adapting to COVID-19, and wages at processing plants have increased more than 5%. Over the first eight months of 2021, feed costs rose by more than 26%, while electricity costs have risen six- or seven-fold compared with a year earlier.
Consumers must pay
No producer can absorb strongly rising input costs without, eventually, passing those costs on to consumers. Retailers, however, keen to protect their own margins and ever mindful of the competition, are less inclined to do so. There is also the risk that if prices rise too high, consumers will cut back.
Where there is some relief for the poultry industry, however, is that the sector is not alone in facing rising costs. Producers of other animal proteins are also suffering, meaning that consumers will experience price rises across meat choices.
With chicken being the most affordable animal protein, broad price rises across meat types could increase demand for chicken as consumers switch to cheaper options. In some markets, people are being priced out of the market.
Will inflation last?
Opinions are mixed as to whether the increase in inflation is temporary or here to stay. Inflation may be running at its highest for decades, but the global economy finds itself in a unique set of circumstances, with well-publicized supply chain, labor and other difficulties.
Assuming that COVID-19 is, eventually, brought under control, the trend may not be long-lasting. Economies should gradually normalize, and supply chain difficulties be resolved, while fear of rising inflation will force central banks to raise interest rates.
Some of the increased costs that producers have had to shoulder over the past two years will remain. Higher labor costs are unlikely to be reversed and feed costs and those for energy remain unpredictable. However, nobody expects the strong growth rates recorded in 2021 to be repeated in 2022 and if interest rates rise, consumers will spend less, further helping to curb inflation. Chicken will retain its title as the most affordable animal protein, even if it is a little more expensive, but retailers will need to work more with producers and not against them.
