Are those poultry company CEOs just putting on a brave face for investors as they head into an economically stormy 2013? They are the ones who talk about being able to pass higher feed costs on to consumers in higher poultry prices. They continue to budget capital expenditures and R&D in the coming year. Some of them are laying expansion plans now for 2014 and beyond.Yet, they, along with other poultry company executives, face an unprecedented continuation of $7-plus corn and $350-plus soybean meal as the U.S. economy teeters on more recession.
Nonetheless, there’s cause for both pessimism and optimism about the U.S. poultry industry’s economic future headed into 2013. It all depends on a poultry company’s cost structure, balance sheet and planning horizon. With cost spreads between companies running in the teens of cents per pound of poultry produced and debt-to-capitalization ratios ranging widely in the industry, there is reason for confidence on the part of efficient producers with good marketing programs. Particularly for those producers whose planning horizons extend beyond the next business quarter and fiscal year.
Economic pain ahead in 2013
No poultry company, however, will be spared economic pain in 2013; and few will remain profitable in the first three months of 2013.
High feed costs were already beginning to bite into poultry industry profitability in the fall of 2012, as many companies began to feed corn purchased at $7 or more a bushel and soybean meal purchased at $350 or more a ton.
Seeking profitability through production cutbacks
Speaking at the National Chicken Council annual meeting in October, University of Missouri-Columbia economist Dr. Ronald L. Plain said, “Less chicken is being produced, and as a result chicken prices are higher but not high enough to cover feed costs. The poultry industry is downsizing production to try and drive consumer prices high enough to pass enough revenue back to farm level to profitably feed $8-a-bushel corn and $500-a-ton soybean meal.”
Poultry industry economist Dr. Paul Aho told listeners in the WATTAgNet poultry and grains outlook webinar that many chicken producers were losing 10 cents or more a pound on boneless breasts this fall (see sidebar, “Chicken leg-quarter prices key to profitability”), and he predicted industry losses would go on into 2013.
Poultry prices, however, showed more strength than expected in recent days. Speaking at the JP Morgan SMid Cap Conference in late November, Joe Frank Sanderson Jr., CEO, Sanderson Farms, said, “The Georgia Dock price went up half a cent a pound to 97 cents the day before Thanksgiving, which none of us can remember ever happening at that time of the year, which is usually a weak period of demand for chicken.”
Downturns come and go, but this one lingers
The current business downturn, nonetheless, is different for poultry producers in a couple of important ways. With the U.S. economy stuck in slow-growth since 2008, sales to foodservice customers are weak for the fifth straight year. Now, the extraordinarily high feed costs, which started in 2012 and are expected to continue until at least the summer of 2013, create the second part of a perfect economic storm for poultry producers.
How past downturns were different
What’s more, the current round of high grain prices is hanging on longer than past run-ups. “The grain crisis of 2008 made for a really challenging year, with corn prices spiking at $8 a bushel,” GNP Company CEO Michael Helgeson said, “but those prices subsided relatively quickly.”
Then, the poultry industry was punished severely in the price-cost squeeze of 2011. It was a year of record losses, with several poultry companies changing ownership.
“There were five months in early 2011,” Plain noted, “when consumers could buy a pound of boneless chicken breast meat cheaper than a pound of baloney.”
One-two punch in grain prices in 2013
Positive economic returns in the first three quarters of 2012 allowed poultry producers to repair balance sheets to a degree. Now, however, the industry is suffering a new round of profit-withering feed ingredient costs—this time due to shortages of both corn and soybeans.
“Fortunately, the financial losses now occurring in the U.S. chicken industry are not as severe as feared back in the fall,” Aho told WATT PoultryUSA. “Companies, however, are still losing money headed into 2013.”
Looking for help from the Southern Hemisphere
The focus has shifted to the second half of the 2012-13 grain marketing year and to the corn and soybean crops in the Southern Hemisphere.
“The next big influence on Chicago Board of Trade grain prices will be the reports on progress of the South American crops," said Sanderson. "We need South America to make a good crop of corn and soybeans to take pressure off U.S. grain exports. We believe there is going to huge plantings in the U.S. of both corn and soybeans, but we will need rain.
“There have been three poor-yielding corn crops in a row in the U.S. We don’t necessarily need a bin-buster crop, just a normal trend-line yield to have substantial corn carryout. However, I think it will take a couple of years to get soybeans inventories back to normal levels. But current grain prices are creating great incentives for U.S. farmers to plant very heavily,” he said.
Optimism from USDA’s chief economist
USDA chief economist Dr. Joe Glauber believes grain stocks can be quickly rebuilt with good weather. “I do think this is a situation that can turn around pretty rapidly,” he said is a speech at the U.S. Grains Council 2012 Export Exchange. “If we get the expected area planted and there is a return to trend yields, we should see substantial stock building in the U.S.”
However, he echoed the concern about soybean inventories, saying, “The risk is if there were to be back-to-back poor yields in South America, in which case soybean stocks would drop precipitously.”
Corn prices at $6 a bushel by 2015?
Ronald Plain noted that the futures markets are also reflecting optimism about the crops. “The futures market is forecasting that it will rain next year and more corn will be produced and the price will trend down and by the end of 2015, corn will be under $6 a bushel. That is better than $8 a bushel but something that by historical terms poultry and livestock would still find tough to live with.”
Prospering amid volatility
Can the U.S. poultry industry be stronger after 2013’s economic storm? Judging from the performance of some of the industry’s most successful companies, the answer depends on their ability to adapt to a changed business environment in several key areas:
- Adapting to increased market volatility
- Being able to pass cost increases along to consumers in the form of higher prices
- Continuing to invest and innovate in a chaotic business environment
Oddly, it is because the industry has cycled between profit and losses with such frequency and rapidity since 2007 that it is positioned to exit the current downturn on a more profitable long-term trajectory. That may not occur without continued economic distress in the industry. The past five years have produced a needed realignment in pricing arrangements between producers and customers. The remaining requirement is for further rationalization of the industry’s productive capacity, which would could occur through industry consolidation.
Volatility in grain markets adds to managerial complexity
Market volatility—particularly in grains—has increased in recent years adding to the challenges of economic forecasting and managing poultry companies.
Speaking to grain buyers at the 2012 Export Exchange, USDA’s Glauber observed there has been a marked increase in volatility in grain markets. “I feel like I have been giving this speech now for about five years, in the sense that here we are, again, another round of price spikes. It’s so unlike the first 25 years of my career, where there would be a big uptick in grain prices and a big global response and then back to low prices for a number of years. The volatility has been sustained in recent years.
“The drivers of the volatility have been a strong world economy, with strong growth particularly in Asian markets. Biofuel production has been such a stimulus on demand corn and on prices as well. And then add to that mix the production shortfalls in grains that occurred in the U.S. this summer.”
Luck is the new ingredient
The increased level of market volatility can sometimes negate the role of managerial skill, according to O.K. Foods CEO Paul Fox. “The high cost of producing a ton of poultry feed is a large enough problem, but the volatility in the price of grains makes luck another necessary ingredient in the formulation,” he said. “Sometimes it is better to be lucky than a good manager. At what point do you step into the market? Are you at a point where you are buying unit trains? Are you going to buy smaller trains even though it increases your freight costs? The market volatility has a lot to do with a company’s ability to navigate this tough environment.”
Poultry companies will need to develop new risk management strategies in order to continue to be successful in the future. Some of those strategies may still need to be invented.
Pricing cost increases in the product offering
Tyson Foods CEO Donnie Smith recently said his company has been able to dramatically reduce the amount of meat and poultry sold in fixed-price arrangements. This helps insulate the company from commodity price swings.
Case Farms CFO Mike Popowycz said that figuring out how to make money with corn prices at $7 a bushel and soybean meal prices at $400 is just another form of innovation. “Over the last couple of years with these high feed costs we have seen a lot of our customers step to the plate willing to pay more for the product.”
Paul Fox echoed this thought: “Innovation is really important. It can occur along the lines of product development, but it could be in other ways. At O.K. Foods we are committed to basic research in live production. We think it gives us an advantage in a lot of important ways that are beneficial to all of our stakeholders and consumers as well. From a cost standpoint, particularly in the environment we operate in today, it helps us mitigate some of the impact that feed cost would have on our bottom line otherwise.
Innovation redefined
“Innovation might have been defined in the past in somewhat different terms,” Fox continued. “People would think about product development or asset-intensive investments on their balance sheets.The definition of innovation has changed. It’s not enough to just to batter and bread chicken to create better margins. We have to be innovative in the way we think and how that changes practices.
Reward for efficiency
“At the end of the day, the market is going to reward efficient operators for meeting unmet demands. There are a lot of unmet demands around the world for products that we make. I think the industry will benefit from that in the long run,” he concluded.
Parting thought
Fieldale Farms CEO Tom Hensley offered the following in a mixture of lightheartedness and seriousness: “I am optimistic that we will have a super corn crop next year and corn prices will get down to $5 a bushel. And there will still be less beef and pork, so boneless chicken breasts can get to $1.75 a pound and leg quarters will be 55 cents a pound. And we will all live happily ever after.”
After all, they say it takes optimism to survive the poultry business.
