Survival of the fit enough
Surviving companies don't have to be the "fittest;" they just have to be "fit enough."
Have you heard the story in which two hikers round a bend in the trail and find themselves facing a large, hungry-looking bear? Both hikers turn and start to run as fast as they can away from the bear. One hiker asks the other, "Do you really think that you can outrun this bear?" To which the second hiker replies, "No, but I only have to be able to outrun you."
Poultry companies are involved in a similar race, but instead of being chased by a bear, they face dramatically higher grain and energy costs in a marketplace with a relative surplus of meat. In mid-summer, corn, soybean and crude oil prices were at all-time highs.
Corn prices even topped the $8 per bushel level briefly in June. Feed ingredient costs have more than doubled in the last two years, and poultry meat prices have not risen enough to offset these increases. John Petersen in this month's By The Numbers column predicts that the U.S. per capita meat supply will not be reduced until early 2009. If he is correct and meat supply remains up or only slightly down for the rest of this year, then meat prices will not rise to levels that will allow companies to move back into the black until next year.
Losses that many poultry companies are experiencing depend on a number of factors, such as how well they forward bought grain and how much exposure they have to commodity meat markets on the sales end. The losses are real, and in some cases, dramatic. In early July, I was told by a turkey industry executive that at $8 corn and current dark meat prices, break-even pricing for turkey breast meat was around $2.70 per pound. At that time breast meat trading was soft at around $1.70 per pound. Even when breast meat hit its all-time low at $1 per pound, turkey companies were not losing $1 per pound on breast meat.
On the broiler side, Pilgrim's Pride, the U.S.' largest broiler processor, reported a $111 million loss in its fiscal second quarter which ended March 29. That is a loss of around $1 million per day, and that was before corn prices rose to their current heights. The challenges that the broiler and turkey industries currently face are probably the toughest in the 22 years that I have been in or around the industry.
The supply of poultry meat will fall to a level that will result in increased prices, which will return the industry to profitability, eventually. This will be a painful process. Some broiler and turkey companies have already cut bird placements, and in some cases have closed plants. There has even been some consolidation of the industry in the first half of the year. Grain costs have increased so dramatically and future grain prices are so difficult to predict that it is possible that some of the necessary production cutbacks that poultry companies face may not be made voluntarily.
The current competition between poultry companies may not be decided by which companies have the best feed conversion, yield or marketing plan. It may come down to which companies have the strongest balance sheet, the best current ratios, the least leverage or who hedged grain well.
Charles Darwin introduced the world to the idea of natural selection and the phrase "survival of the fittest" came to be used almost synonymously with it. In business and economics, "survival of the fittest" has come to characterize how the weak and inflexible companies fall by the wayside and the strong and adaptable live to compete into the next business cycle. But, "survival of the fittest" implies that only the strongest company survives, and that is not usually the case. Surviving companies don't have to be the "fittest;" they just have to be "fit enough."