Barring a drought in the Corn Belt that could negatively affect the fortunes of the US chicken industry, the year 2012 (at least in the first half) turned out to be better than 2011. The entire industry returned to profitability earlier this year after a year when hardly a single plant was making money. The profitability of the first half of the year was not just a simple matter of higher chicken prices and lower grain prices. There is something else going on: The leverage provided by higher leg quarter and wing prices.
The rise of leg quarter prices
Just a few years ago, leg quarters were so inexpensive that the US industry needed a high price of deboned breast to be profitable. As the price of deboned breast fell over the last few years, the industry suffered reduced profitability. However, in stealth-like fashion, the value of leg quarters was slowly increasing thanks to better demand for exports and in the domestic market. This increase in the back half of the chicken went almost unnoticed because the drop in boneless breast was more immediate and painful. When boneless breast finally turned around this year, additional revenues were added to an already substantial base from leg quarters, thereby producing surprisingly good profits.
The shift in revenue from the front half to the back half of the chicken was illustrated well in a Pilgrim’s publication earlier this year comparing revenue by part in 2004 (the bad, old days of cheap leg quarters) with revenue by part in 2012. In those eight years, the revenue from leg quarters increased from 15 percent to 21 percent, while the revenue from breast meat and tenders dropped from a dominant 66 percent to 47 percent. This is a healthy development for the long-term international competitiveness of the industry.
Several factors increased prices
What can explain the increase in price of leg quarters in the last six years? Part of the explanation is the success of finding new export markets to replace Russia. In addition, leg quarters and deboned thigh meat are more popular inside the U.S., particularly during the current economic downturn. Finally, low profitability led to production cuts that reduced the availability of leg quarters. With fewer leg quarters and robust demand, prices increased steadily from 28 cents per pound in 2006 to more than 50 cents per pound at times this year.
Without a new trade dispute, leg quarter prices are likely to remain higher than historical levels. Freer trade and higher leg quarter prices have a direct and surprisingly robust effect on profitability. The investment made by the industry in the work of the USA Poultry & Egg Export Council and the help of the Office of the United States Trade Representative and others in opening and maintaining markets has a powerful effect on the bottom line.
