Beyond the triple threat

There are no formulas guaranteeing profitability in the poultry business, and needless to say profitability is unpredictable and can be transitory. Some analysts, in fact, now foresee deteriorating market conditions ahead for the U.S. broiler industry. As Kim Souza writes in Northwest Arkansas' The Morning News, the U.S. poultry industry faces "three difficult hurdles in the coming months with higher feed costs, questionable export markets and a rising supply due to increased production."

Up until lately, chicken companies have fended off higher grain costs with historically high breast and leg-quarter prices. But, as this was written, breast prices had dropped, seasonally, since the end of August, by 30 percent. And leg-quarter prices are threatened by Russia's ban of imports from 17 chicken processing plants in the USA.

There was a time when the chicken industry would have shrugged off price dips in leg-quarters. But not so today. Leg-quarters have become a major factor in industry profitability, with these parts selling at 39 cents per pound compared to 24 cents a year ago.

Just as global markets are increasingly essential to industry profitability, they are capricious. As this was written, the Russian government had not officially said why shipments from the 17 U.S. facilities were banned. Some analysts believe Russia is engineering a trade disruption in hopes of reducing leg-quarter prices. From the Russian perspective, the issue may just as likely be stopping the flow even partially of foreign chicken that competes with local production.

Even before the announcement of the Russian ban, poultry and meat companies were preparing investors for lower profits in 2008. In September, for example, Tyson Foods reduced its profit forecast for the year through September, citing an increase of nearly $300 million for grain costs.

The triple threat, in fact, isn't new. Unpredictable grain prices, overproduction and trade stoppages are familiar challenges for the industry, and companies have responded in various ways over the years through diversification, value-addition in products and consolidation. At least one company (ConAgra) saw abandonment of the integrated production model as an answer. And just this year, poultry companies had success in passing increased grain costs along to consumers. There are as many different solutions as there are companies; and where one solution works in one time or circumstance, the opposite may work in another.

Now, however, there are new challenges that must be met by the poultry industry ones driven by changing social, economic and regulatory realities. For example, as consumers become more concerned about the social dimensions of companies and products, purely economic appeals compete with social concerns. The business calculus must include questions such as the following: How does a company handle its environmental responsibilities? How does it treat its workers? Do its products reflect the social aspirations of consumers? These challenges will require approaches that in certain respects are antithetical to some tenets that have so far led to industry success.

As these challenges exert themselves in the business and regulatory environment, poultry companies could find themselves facing something entirely new rising real, inflation-adjusted poultry prices. This would be a departure from the 50-year norm. The emphasis in the hunt for profitability could shift somewhat from cost reduction and mass markets to margins and market segmentation. One way or another, companies now face new and more complex challenges.