Poultry Confidence Index: Corn prices -- spoiling the outlook

The first thing you will notice about this quarter's Poultry Confidence Index is a tremendous jump in optimism about present-day business conditions. The Index had declined for several quarters but bounced back this quarter with a vengeance. Concern over high corn prices, however, is spoiling the longer-term outlook.

The Overall Index now stands at 112.6 (1996 baseline = 100), up from 76.3 last quarter. The Present Situation Index increased to 153.0 from 84.0, while the Expectations Index edged up to 85.7 from 71.2. The Overall and Present Index represented two-year highs, while one of the sub-indices Future Opportunities was the highest it had been in eight years!

Resilient market shows stubborn growth

In an eerie coincidence, the Consumer Confidence Index followed a similar pattern with large increases in the Overall and Present Situation Indices and a smaller increase in the Expectations Index. Like the consumer market, the poultry industry is showing remarkable resiliency in face of economic challenges, suggesting a stubborn growth pattern. Both markets remain upbeat about present-day business conditions.

The consumer and poultry markets share another commonality trepidation about the future. Especially fears of increased costs. For consumers, this fear was focused nearly exclusively on rising fuel costs. Poultry personnel were also apprehensive about energy costs, especially propane, but rapidly rising corn prices were of much greater importance. Given that feed represents about two-thirds of the finished-goods cost, these concerns were justified.

Some estimated that feed costs had risen 25 percent in recent months and predicted prices of $3.50 to $4.00 per bushel in the near future. The siphoning of corn for ethanol production is the primary reason for these record-setting levels. In addition to higher costs, poor bird health has been reported due to higher-than-normal mycotoxin levels from substandard corn (ethanol requires high-grade corn, decreasing the quality for other markets).

As one producer said, "Margins have not been affected yet because of a very strong domestic market." Another echoed, "Live costs are much higher due to higher feed cost, but markets have adjusted." Some suggest, however, that the markets are nearing a breaking point.

Dock prices have been rising consistently throughout 2007. This has resulted in prices 17 percent above year-ago levels. Given this opportunity, producers have responded with a 3 percent to 4 percent increase in egg sets during much of the second quarter. Placements have followed suit.

Margin pressure being felt, says respondent

This combination of increased placements and higher costs has started to put some pressure on the market. While producers have been able to ride out higher corn prices due to equal-or-better poultry meat prices, many fear this is not sustainable if supply increases too rapidly. As one individual stated, "We are starting to get a downward pressure on margins, even with advancing prices." Another said, "Right now market conditions are helping to overcome, but costs are rising and prices can't sustain their advances forever." The main concern is that poultry integrators will not be able to pass on their increased costs to clients and consumers at a pace equal to their own.

To help alleviate these pressures, integrators have started to reformulate their feeds with alternate ingredients, pre-book their corn suppliers, curb unnecessary spending, reduce capital investments and consider cost-plus pricing.

Significant increases in meat prices over year-ago have helped integrators lessen the impact of rising corn prices. Some fear, however, that poultry meat prices will fall or stagnate as production increases, leaving integrators holding the bag on cost increases. This could negatively impact profits and margins by the year's end.