What's ahead for the 21st century broiler producer

Bill Roenigk talks with WATT PoultryUSA aboutthe future of the U.S. broiler business, including the issues of industryconsolidation, business models and international trade.

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WATT PoultryUSA:  Bill, congratulations on completing over 39 years of service to the U.S. broiler industry. As you retire from your full-time responsibilities as senior vice president at the National Chicken Council and take on a part-time consulting role, what is the biggest change you've witnessed in your four decades in the industry?

Bill Roenigk:  When I joined the National Broiler Council in 1974, there were over 200 chicken companies in business. Today there are around 40. The industry produced 7 billion pounds of ready-to-cook chicken in 1974, and USDA projects that over 38 billion pounds will be produced this year. While there are one-fifth as many companies in business today, they are producing five times the amount of chicken.

WATT PoultryUSA:  Do you foresee continued industry consolidation?

Roenigk:  Consolidation is not over in the U.S. chicken industry, but I don't see strong evidence that the U.S. chicken industry will be made up of just large companies, or even a mixture of large and midsize companies. Many of the smaller chicken companies can do a better job of meeting the needs of the markets that they're servicing than the larger companies.

Beginning as early as the 1960s, industry analysts said there would be 10 chicken companies in 10 years. As the decades went by, that prediction was repeated, but I don't think we're going to see 10 companies in the next 10 years, and probably not the 10 years after that because of the dynamics at work in the industry.

WATT PoultryUSA : Today, the four largest companies produce about 55 percent of the chicken sold in the U.S. Beneath that top tier, 12 so-called midsize companies account for around 37 percent of the industry's production. Smaller companies make up the balance. Is that industry structure going to prevail over the next 10 years?

Roenigk:  It's true the market shares of the four largest chicken companies have inched up in the last few years. However, if you look further back to the 1950s and early 1960s, the companies that tended to dominate in the industry are no longer in business. Those included companies like Ralston Purina and Pillsbury. The thinking in that day was that the industry structure was the way it was going to be. But those large companies discovered the volatility and the challenges of the chicken business were not what their management and stockholders preferred. So those companies exited the chicken business for other opportunities. I'm not suggesting that the top chicken companies of today are going to exit the business - I don't think that is going to happen - but for their growth to be profitable, it will have to be in step with the overall growth of the industry.

WATT PoultryUSA:  Which companies will grow in the future?

Roenigk:  While I foresee the large companies as growing in concert with the overall industry, small companies will grow at the rates of the particular markets they serve. The so-called midsize firms are the ones that have decisions to make in terms of their growth. Can they continue to compete and survive by standing pat at their relative size? Do they need to grow to a larger size? Some might decide to form alliances with other midsize companies.

WATT PoultryUSA:  The "rule of three" in economics suggests that there will be three major competitors in any mature market and perhaps other companies that survive by operating in niche markets. Do you foresee three chicken companies emerging as more dominant than today?

Roenigk:  Three companies tend to dominate in industries in which significant barriers to entry exist. Those barriers may be in attracting capital for growth or finding risk-taking owners to manage the businesses. While the entry barriers are not insignificant in the chicken business, there are quite a few lenders willing to help companies build and expand their businesses.

While there may be three or four dominant companies in the chicken business in the future, the other companies are not going to disappear. Those other companies have the opportunity to compete and challenge the bigger companies for market share. I think the smaller companies, and to some extent the midsize companies, are in an excellent position to keep the bigger companies busy trying to keep up with all the competition.

WATT PoultryUSA:  The emergence of the multi-protein business model has been pretty remarkable. What impact will this have on the future of the U.S. chicken industry?

Roenigk:  The multi-protein model - all the meat proteins under one corporate umbrella - might become somewhat more prevalent, if for no other reason that it allows firms to spread their risks across broader business portfolios. But U.S. chicken companies that have stuck to their knitting, so to speak, and produce a good chicken, are going to be very difficult competition for other companies, whether they're multinational or multi-commodity. So I believe there will be a mix of approaches in the future with no clear-cut business model going forward.

Another consideration involves family ownership of companies. A number of chicken companies started by industry pioneers are family owned and operated by the second or third generations. The question becomes - does the family have the passion, the willingness to accept the market risk and other risks to keep the company going? Or does a larger company, which has interests in beef or pork or turkey and now wants to get in the chicken business, make an offer to those family owners to which they can't - from a financial standpoint - say no.

Potential acquirers - many of whom might have other animal agriculture interests - are not just other U.S. chicken companies but include international companies. While ownership of U.S. operations may, or may not, be their most profitable investment in the short term, some of them may be seeking a more diverse business portfolio, which could include the geographic diversity of having operations in the United States, Brazil, Europe, Asia, or wherever. The diversification - as your question implied - could also include beef or pork or turkey or chicken.

WATT PoultryUSA:  Meat and poultry consumption is growing the most internationally - and especially in developing nations with growing middle classes - not in the U.S. How do you foresee the international market opportunity playing out?

Roenigk:  There's tremendous pent-up demand around the world for animal agriculture products, including poultry. Consider, for example, that between now and 2022, China's middle class will grow by over 300 million consumers. There are about 314 million people in the United States now, so the Chinese middle class is going to grow by about the size of the U.S. population over the next 10 years.

The question is will the poultry to fill that demand be produced in countries, like China, where it is to be consumed? Or will it be imported? Or will both things happen? Specifically, is it going to be Chinese companies that serve that growing demand for chicken? Or is it going to be joint ventures or producers in other countries that produce the chicken to fill that demand? The evidence now seems to indicate the demand will be filled by a combination of those things.

"Free trade" will hopefully be driven by agreements now under discussion, but the chicken industry's foodservice and retail grocery customers also will play an important role in how this opportunity is tapped. Whether it's companies like McDonald's or KFC or Walmart, they like to be able to source their food products from where they can have the best value and consistent quality, so they can deliver those products to consumers, whether in China or Europe or North America, or South America.

The poultry industry's foodservice and retail grocery customers with an international footprint will be important drivers of the trade in poultry. These companies will be glad to import it if that's the best thing, or if they think a domestic company in China can do it better, they will encourage that to happen. These international food companies will be supportive of encouraging companies' suppliers to locate where they think they can do the best job. However, better trading rules are needed for that type of more dynamic marketing to happen.

WATT PoultryUSA:  Will U.S. chicken exports continue to increase in the future?

Roenigk:  Even up until the early 1990s, U.S. exports of chicken were pretty much limited to whole birds. Now it also includes chicken leg quarters and parts. But the greatest export opportunity in the future will be in further-processed chicken or prepared food products. Ten years from now, we will look back and see that's where international trade really took off. So there will be some increase in the tonnage of U.S. poultry exports, but the greater growth will occur in the value of those exports.

Foodservice and retail grocery chains will figure out how to market these products in markets that are not the wealthiest. Consumers there will figure out that these portions, while they may be a little bit more expensive per pound, are a good value and perhaps better than bulk leg quarters.

WATT PoultryUSA:  Is there one key challenge that will define the future of the chicken industry? Obviously, chicken companies have to be efficient. They need a good marketing plan. They need to have good succession planning, especially if they are a midsize or smaller company. What else?

Roenigk:  I would put near the top of that list the ability to understand and analyze grain and oilseed markets going forward. It is going to take greater ability, deeper insight to deal with the volatility in the costs and availability of grains and oilseeds which, after all, represent the biggest costs of producing chicken or poultry.

The industry has recently been enjoying lower corn prices that resulted from the good crop and greater supplies, but there's going to continue to be greater risk in the future in terms of potential shortfalls here or there in grains and oilseeds. With the increases in food consumption worldwide, there's going to be plenty of demand for these crops. Staying aware of these challenges on the supply side and demand side is something chicken companies are going to have to do a much better job of. Volatility is going to be as difficult a challenge in the future as it is now. A management style that can take on these risks will be required.

 

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