Added value or just added cost?
The market is currently giving a relatively small premium to products with added costs.
For the last few decades U.S. chicken companies eagerly exited the commodity chicken business. The common wisdom was that selling commodity chicken was the road to ruin. Success was to be found in adding value to lowly commodity chicken.
Adding value does not, of course, automatically lead to higher profits. It would be more accurate to say that cost rather than value is added to commodity chicken when “adding value.” Once that cost is added there is an abiding expectation that the resulting product will sell for more than the added cost. It is only under those conditions that adding value is worth the effort.
Most of the time this process works as advertised (given enough advertising). However, at the moment, the market is providing an unusual degree of profitability to those products which have little or no value added.
Evidence of the higher profitability of low-value products can be seen in the comparison of the Georgia Dock Whole Broiler price to the Northeast price of boneless skinless breast meat (BSB). In 2003 BSB was 90 cents more per pound than whole broilers. Now the difference is only 50 cents.
Value subtraction is an appropriate description of what is currently going on in the poultry industry. U.S. companies are operating large bird deboning plants at below capacity while operating tray-pack plants near capacity. During the recession, the market will be less interested in the value-added products made from BSB and more interested in lower value bone-in products. Even within the category of value added products less may be more. One company puts the best possible face on the situation (but tortures the English language) by speaking of “value, value-added products.”
By next year, adding value should once again take its accustomed place in the chicken industry. However, for the moment, adding “value” may paradoxically reduce value to the bottom line.
Should the U.S. chicken industry add value? If that is a strategic question the answer is yes. However, if the question is tactical the answer may be; not so fast. In the current upside down world, less is more and added costs are sometimes just added costs. There is no guarantee that the economy will recover at the end of this year as predicted. It could be a tough slog through 2010. Should that be the case, the highest profitability may well be temporarily found in normally lower profit products.