The U.S. poultry industry started the year 2011 in a bad state; pessimism in the industry was at its highest levels. Grain prices were high, fuel costs were rapidly rising and excessive supply was dampening prices. All in all, there were few or no positives. Although many of these negatives extended into the second quarter, confidence improved as the industry adapted (as it always seems to do). Now in the third quarter of 2011, confidence has stabilized and outlooks for future profits are bright.
The WATT PoultryUSA/Rennier Associates Poultry Confidence Index remained steady in the third quarter of 2011. The Overall Index now stands at 79.0 (1996 = 100), down slightly from 84.4 the previous quarter. The Present Situation Index dropped back to 74.2 from 91.1 (a one-quarter blip?). Finally, the Expectations Index rose slightly to 82.1 from 79.7.
‘Present situation’ still weak
Opportunities – more precisely the lack of new jobs and unemployment – were the primary drivers behind the fall in the Present Situation Index. These issues have received a lot of press lately. As stated in the June edition of the Consumer Confidence Index, “Consumers’ appraisal of current business and employment conditions was less favorable as concerns about the labor market continue to weigh on consumers’ attitudes.”
The poultry industry is experiencing similar apprehensions. As one PCI respondent summarized, “Even though opportunities may be available, the company is reluctant to replace or add to the head count due to the current economic conditions.”
On the positive side, profits expectations rose substantially, from 64.4 last quarter to 89.6 this quarter, continuing a steady climb since the first quarter. This is surprising given the numerous comments received about the high cost of grains – “Input costs are very high due to grains,” and “Grain prices will continue to erode.” And there were predictions of a long and sustained recession ahead – “A clear-cut recession is looming,” and “The economy is headed for a deep recession.”
Profit expectations
So what’s driving profit expectations given unrelenting grain prices? Especially when respondents said things like the following: “It can’t go any lower,” or “It can’t get any worse.” Like many times before in many different commodity markets, when profits go down, producers will cut back to align supply with demand. This has started to occur.
In addition to confirmatory comments like, “I believe the industry has taken real steps to limit supply,” recent data points to a 6.6% decline in weekly egg sets. This figure has accelerated in recent weeks, a positive sign that the industry is moving in the right direction. However, according to BB&T Capital Markets analyst Heather Jones, reductions in the range of 8% to 9% are required to return the industry to profitability.
Summary
After hitting rock bottom in the first quarter of 2011, confidence in the U.S. poultry industry rebounded in the second quarter and remained steady in the third quarter. Even though grain prices remain a thorn in the side of the industry, news of production cuts is cause for celebration. Expectations for higher profits are on the rise.
