What’s ahead for US chicken industry production, profitability?

Meat and poultry company executivesdiscussed the industry outlook during a roundtable at the National ChickenCouncil Annual Conference.

“How long will the favorable financial times continue?” That question was top-of-mind as chicken industry leaders gathered in Washington, D.C., for the National Chicken Council's (NCC) 60th Annual Conference.

Four experienced industry veterans addressed this key question and related issues for the poultry meat business. Although the panelists noted a number of challenges to an increasing level of chicken production and a recognition that the industry is maturing, the consensus was there are great opportunities ahead, and companies need to prepare now to take full advantage of an expanding consumer demand for chicken.

Chicken industry outlook for 2015

Asked about the production, exports, and consumption of chicken and red meats, the panelists agreed, for the most part, with the U.S. Department of Agriculture (USDA) forecast of a 3 percent increase in chicken production in 2015. While this is the consensus rate of increase, there are many reasons it could be more or less. At the same time, panelists noted strong incentives to expand production of all poultry and red meat. Critical factors, however, will limit expansion plans for most of 2015, if not longer.

Roundtable members were especially bullish on exports and consumption, noting that the tight supply of beef is benefiting the market shares of competing meats.

Is there a chicken cycle?

Roundtable members responded to a question about the three-year chicken cycle; that is, one good, profitable year, followed by a breakeven/so-so year, and then followed by a less-than-profitable year.

Lampkin Butts, president and chief operating officer of Sanderson Farms, tended to agree there may have been a chicken cycle during the 1970s and 1980s when chicken production and consumption were increasing in tandem. Growth in foodservice demand for chicken especially fueled chicken consumption during this time. If the industry did experience unprofitable years, the tendency was to hit the pause button and wait for demand to catch-up to marketing. Since 2000 and especially during the past 10 years, the industry dynamics have not been driven by cycles but rather by “events.” He cited examples of “events” as follows:

  • The disruptions to the Russian export market
  • World over-reaction to outbreaks of avian influenza
  • $4 a gallon gas coupled with $8 per bushel corn
  • The banking crisis and recession of the U.S. and other world economies

Butts said the latest “event” was the devastating drought of 2011 causing Sanderson Farms to experience its worst financial year ever.

Government action plays pivotal role

Mike Welch, CEO, Harrison Poultry, added to that line of thinking by noting that cycles still exist, but the cycles are now longer with the peaks higher and the valleys lower.

He likened “interruptions” to “events,” explaining that government actions, both positive and negative, are the most important factors in causing cycles to be interrupted.

One positive factor was President Bush providing government involvement to get U.S. chicken leg quarter exports started to Russia in the early 1990s. As the Russian market developed, the overseas sales of U.S. chicken became a “small miracle,” he noted.

Government mandating that corn be used to produce ethanol is not only the latest example of negative government interruption in the chicken business but also has been the most devastating. He sees more interruptions, especially by the government in the years ahead.

Referencing current industry economics, Welch pointed out that it really takes much longer to increase production when hatching eggs are not in surplus, meaning it takes seven months for a day-old pullet chick to reach maturity.

Chicken consumption

Asked if per capita chicken consumption can again reach its peak level of 88 pounds in 2006 and if total poultry/meat consumption can again exceed 220 pounds per person, as was the case during 2004 through 2007, Welch said there is a variety of opinions on this question. In his mind, the answer will be determined by whether chicken becomes more affordable and also more price competitive with other meats.
Further, if the U.S. economy returns to a more robust rate of growth with improved employment, consumer demand for chicken will improve, especially for the away-from-home market. Favorable developments, like the popularity of the Adkins diet, benefited all animal protein but are not basic, solid factors to sustaining long-term higher levels of consumption, he said.

Headwinds to increased chicken consumption

Bob Ruth, president of Country View Family Farms, said you can “never say never” about consumption of meats returning to previous peak levels, but acknowledged that certain headwinds will make it more difficult to achieve higher and higher consumption. Foremost in the headwinds are activist groups who are working 24/7 to eliminate meat from America’s diet. At the same time, Ruth believes that while most major meat and poultry companies are not going to neglect the domestic U.S. market, he sees a continuing and increasing emphasis on building the world market for U.S. meat and poultry.

Changes in the U.S. chicken industry

Randy Day, executive vice president of supply chain for Perdue Farms, pointed to three areas where the chicken industry has changed over the past 40 years when he first started with Perdue Farms.
First, concentration of the industry through acquisitions and mergers has given the business a different set of characteristics. Companies that have been able to respond to market opportunities tended to be the survivors. That will not change going forward.

Second and most significant has been the extraordinary and evolutionary improvement in poultry husbandry. “We understand the bird so much better today than 40 years ago,” Day said. And, the understanding and improvements are not over. Geneticists say they can continue to reduce time-to-market weight by one-half day per year. The scientific accomplishments have been “absolutely phenomenal,” in both the breeder and the broiler, he added.

Third, both chicken companies and their customers have attracted an “awfully lot of attention” from groups that would like to control and manage our industry, Day noted. In fact, some of these groups would like to see us go out of business, he concluded.

Chicken industry consolidation

Butts picked-up on Day’s point about industry consolidation. He believes that development toward fewer but larger firms will continue. In the past (the 1970s through the 1990s), there was always a domestic buyer for a chicken company wanting to sell or financially needing to exit. But, with the “events” and “interruptions,” especially since the government ethanol program was ramped-up in the mid-2000s, foreign interest in buying U.S. chicken companies became apparent.

Butts also noted there will always be a place for one-plant chicken firms. “Success is not dictated by size,” he argued. Rather success is better determined by company culture and a dedication to being a long-term player, he told the conference.

Piglet virus impact

Ruth explained that the PED virus that killed as many as 8 million piglets during the last half of 2013 and the first half of 2014 painfully demonstrated that the U.S. import inspection system for live animals and related products is “woefully inadequate” in terms of preventing such a deadly disease from entering the U.S. hog herds. Also, the bio-security containment program has not proved effective.

When the disease hits a sow operation, it is 100 percent lethal to the piglets. The hog industry could lose an additional 4 million piglets this winter and next spring, but there are no good indicators to foretell the impact going forward. Unfortunately, operations that re-break with the virus usually experience 50 percent mortality with the piglets and the (tail) is longer than four weeks on the re-breaks.

In early October 2014, two major hog operations broke with the virus, which is not good because the cold weather had not yet arrived and, therefore, the barns were not yet closed-up. These two operations have sophisticated biosecurity measures. So, the initial evidence for this coming season is “not good,” Ruth noted.

Day said his company’s hog operation is relatively small but, nonetheless, vulnerable. He remains “fairly optimistic” and hopes that what his managers have learned enough about the disease so that his operation will be “OK.”

More big birds?

Panelists were of the general opinion that the trend toward more and larger (8 pounds liveweight) broilers being produced will continue.

In 2005, 6 percent of the chickens grown were in USDA’s heaviest weight category (7.76 pounds, liveweight, and heavier). Currently, the share is well over 20 percent.

There is a cost advantage with the larger chickens, Butts explained, especially for the 9-pound birds.
Welch agreed that the trend toward bigger birds will continue until the profit erodes for this size category. He noted that one plant in the first quarter of 2014 processed chickens that averaged over 10 pounds, liveweight, something which was a first for the industry.

In the end, the industry will continue to “chase” the movement toward bigger birds until the genetics and economics dictate otherwise, he concluded.

Contributors to profitability

Profitability in the chicken and pork industries can be attributed to the tightening supply of beef, all the panelists agreed. Also noted were lower feed costs and constraint in chicken production imposed by a limited hatchery supply flock. Unless there is an unexpected interruption to these factors, profitability in poultry and pork remains the most likely outlook, the panelists generally acknowledged.

Sources of stepped-up production

Increased chicken production over the next two or three years will come from both more birds and heavier birds, as has been the experience in recent years, the panelists explained. More complexes will likely convert to producing/processing 9-pound and heavier birds, Welch noted.

“Not a lot of new processing plants have been built in recent years,” Butts said and added that Sanderson has two complexes in the pipeline to come on-stream.

The basic take-away was that existing plants will be enlarged to add more slaughter/processing capacity.

Interestingly, none of the panelists foresee USDA permitting higher line speeds over the next two to three years as a way to boost output.

Don’t succumb to disincentives

More government regulation and interference in doing business can be dis-incentives to keeping the chicken industry dynamic and forward-looking, the chicken panelists argued. But, despite the heavier hand of the sometimes politically motivated government actions, “we should never give up,” Welch said. With the scientific strength and positive economics of chicken production, there are not any problems the industry can’t solve, he added.

Optimism about the ‘real market’

Butts concluded with an optimistic outlook. The “real market” for the industry is to set 220 million eggs per week, as it did in 2007 before the recession hit the U.S. economy. This year the industry is setting 206 million eggs per week and will set a few more than this level in 2015.

He hopes and tends to believe that the economy can approach a 6 percent annual increase in the Gross National Product if the proper political climate and will are restored. Such growth in the economy will be especially favorable for foodservice demand for chicken and overall positive for consumer demand for all poultry and meat, he concluded.

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