As for the ebb and flow of supply/demand and profitability, U.S. poultry production cycles come and go so quickly as to make red-meat competitors’ heads swim. That’s due, in part, to the cow’s gestation period of around 285 days and the pig’s 113 days, while chickens hatch in just 21 days. So, by comparison, poultry producers are able to transition from production cutbacks to full capacity on a dime.
Not in the latest broiler cycle, however, which has broiler producers operating in what, in economic terms, may seem like an ongoing scene from The Matrix. Instead of time slowing down to allow the movie’s hero to dodge bullets, the economic pulse of the meat and poultry complex has been slowed to a fractional rhythm as producers undercrank meat output relative to existing demand.
Supply and demand are out of sync because the meat and poultry complex’s response to high prices has been slowed by a prolonged slump at the breeding level of the supply chain, according to economists at Informa Economics speaking at the Oilseed & Grains Trade Summit (OGTS).
- A smaller cattle inventory, declining calf crops, smaller cattle supplies and reduced cow slaughter are resulting in record-low beef supplies and high prices, said Mike Sands, vice president, Informa Economics. Meaningful increases in beef production are at least two years away.
- Despite high prices, pork production may not increase more than 2 percent to 3 percent in 2015, and the increase could be smaller, if producers don’t bring some disease problems under control this winter, according to Dr. Richard Andersen, executive vice president, Informa Economics.
- While turkey production has already risen, chicken production is picking up steam, following very modest increases in 2014, said Mark Jordan, Informa’s director of poultry and egg services.
The U.S. economy’s recession of 2008-09, in fact, spurred cost reductions that severely wrung capacity from breeding herds and flocks, and even anemic post-recession demand is now outstripping the available meat supply. Further limiting expansion is a two-year course of porcine epidemic diarrhea virus (PED virus), which has caused high piglet mortality on many farms, and management problems in broiler breeding flocks, which until recently have suppressed productivity.
Lower grain prices change margin structure
Add one more variable to 2015’s economic plot: A bountiful corn and soybean crop in 2014-15 has resulted in dramatically lower feed costs to set the stage for handsome margins on every pound of meat and poultry brought to market.
Tom Scott, CEO of Informa Economics, presented some of the crop details at the OGTS:
- Record production of feed grains in 2014 has the world’s ending stocks at their highest level since 1999-2000
- The 2014-15 U.S. corn carryout is the largest in 27 years, and corn futures prices recently hit their lowest level since 2009.
- The soybean crop produced record yields on record acreage and the forecast is for the largest carryout of stocks since 2006-07.
Jordan shared the following forecast for poultry industry profitability:
- Even with an expected 10 percent to 15 percent decline in the composite value of broiler meat, profit margins are poised to remain strong in 2015 due to the cheaper feed inputs.
- Informa’s forecast is for profitable broiler margins (wholesale weighted basis) at or above 10 cents a pound for all four quarters of 2015.
- While profit margins for turkey meat are expected to pull back sharply from the high levels of the final three quarters of 2014, the forecast is for margins to be positive in all four quarters of 2015 and ranging between 16 cents and 30 cents a pound.
So the race is on to bring red meats and poultry to the marketplace in 2015.
Pork industry’s response to high meat prices
The PED virus will play a big part in how quickly the pork supply increases. New vaccines, whose efficacy have yet to be demonstrated, are being administered this winter to help control the disease.
Andersen said the economic incentive to increase supply is strong. “With the pricing structure on hogs expected in 2015 it is like the industry is going to be printing money,” he said. “This is a very strong financial time for hog producers. Can the pork industry recover fully and get back to a level of productivity? There are operations that are still vulnerable to the disease, and they have been cautious about rapid expansion,” he explained.
Margins on farrow-to-finish pork production are very favorable, he said, and in normal circumstances would be generating 10 percent to 15 percent growth.
Increases in pork expected to be modest
Andersen expects only a 2 percent to 3 percent increase in pork production in 2015, and the increase could be smaller, if producers were to be unable to bring the PED virus under control this winter. This has driven prices up strongly.
“There is the threat of having extremely small pork supplies,” he said. “The threat for foodservice and retail buyers is possibly not being able to buy the amount of pork they need. For that reason, some level of double buying is occurring as they try to protect themselves from the supply side risk."
Even though Andersen expects some of this psychology to wind out of the market soon, the reality is that the market is less than satisfied with the available supply to satisfy the domestic and export markets.
High beef prices support chicken and pork prices
“With beef prices expected to be extremely high, it is going to create a nice umbrella effect for chicken and pork producers who are able to bring pounds to the market,” he said.
“In fact, I don’t think the expected increases in pork supplies in 2015 will have the same price-dampening impact on meat prices as would typically occur. Prices for pork are going to stay strong, even during the initial period of increasing supplies,” he concluded.
Uptick in poultry production expected in 2015
Chicken production is beginning to pick up steam, according to Jordan, following very modest increases in 2014. While chicken production was expected to register an increase of a little under 2 percent in 2014, he forecast that producers would be able to grow production between 3 percent and 4 percent, year over year, in 2015.
He noted that the last time ready-to-cook chicken production increased above 4 percent was in 1999.
Jordan told listeners that poult placements had been running sharply above 2013 levels since the spring of 2014 and ready-to-cook turkey meat output was expected to exceed prior year levels by 7 percent to 8 percent in the fall and winter of 2014. Ready-to-cook turkey production is forecast to increase by less than 2 percent in 2015.
Meat and poultry demand in 2015
“Competing meat supplies have supported strong domestic demand for chicken but should diminish as a factor next year,” Jordan said.
“Composite chicken prices are set to decline from 2014 averages, but broiler wing prices will be stronger in 2015,” he said. “Even with a 10 percent to 15 percent decline in the composite value of broiler meat, profit margins are poised to remain strong due to cheaper feed inputs.”
While demand may be somewhat softer for both chicken and turkey in 2015, Jordan pointed to the positive effects of increased turkey exports and what he called the “ground turkey craze."
“More and more retailers are carrying ground turkey products, including sausages and burgers, and many fast food chains now also offer ground turkey products,” he noted.
Another positive development, according to Jordan, is that the U.S. turkey industry exports between 12 percent and 15 percent of its production.
Lower chicken prices but margins positive
Chicken prices may present a win-win situation for producers and end users in 2015, Jordan said.
“While chicken prices may decline some, producer costs for grains are going to be much lower than a year ago. With the lower feed cost structure that is unfolding, even though there may be declines in chicken prices in 2015, the outlook is still very strong for chicken industry profit margins,” he said.
What’s ahead for 2015-16?
Following are other key factors discussed at the OGTS that may influence the economic outlook for poultry producers in 2015-16:
- Weather has been favorable in many parts of the U.S. in recent weeks providing adequate moisture for next year’s crops in most planting regions.
- U.S. crop planning revenues for 2015 show soybeans as a more lucrative crop to plant than corn.
- The bloom is off the rose for commodity investors and the dynamic effects of commodities speculation have subsided for now.
- While various interests may agree or disagree about the way the build-out in U.S. biofuels capacity was handled in the past, the market is past the inflection point on corn supply and demand for ethanol, barring further changes in government mandates.
- The cooling of China’s economy, the weakening of oil prices and the big drop in grain prices has some observers asking, "Are we reaching the end of the commodities super cycle?"
- The U.S. dollar has been strengthening for some time but this has not greatly impacted U.S. agricultural trade flows – yet.
- The U.S. transportation system (barge and rail) is stretched to capacity and shipping costs are high for grains and other commodities, narrowing the cost advantage for U.S. versus Brazilian shippers.
- The Transatlantic Trade and Investment Partnership (TTIP) and Trans Pacific Partnership (TPP) under negotiation would potentially benefit the U.S. poultry industry. There are, however, major hurdles to the completion of these treaties.
The Oilseed & Grain Trade Summit was hosted by HighQuest Partners and Informa Economics.
