Preparing for poultry-foodservice contracts in 2017
Poultry producers need to be ready to handle foodservice buyers’ expectations in a low-feed-cost environment in contract negotiations for 2017.
What’s good for the production side of the poultry business can lead to apprehension on the sales side of the poultry organization … with foodservice buyers watching both sides closely.
Those on the poultry production side are applauding the current corn market decline. Corn futures are pushing downward to levels not seen since 2006.
That’s good news for the poultry producers. But the sales side of the poultry organization typically will not look forward to the upcoming negotiations with foodservice buyers. After all, the poultry buyers will be loaded with a low-input cost mindset … and matching low-price expectations.
The poultry buyers’ mindset
Many poultry buyers in the foodservice industry are frustrated and upset that 2016 annual pricing created values that were well above actuals to date.
Foodservice buyers are fixated on the cost differences from 2014 to 2015, as well as changes from 2015 to 2016. And with only minor price adjustments since late 2014, they are looking to “catch up” … hoping for prices that will make up for adjustments that (they believe) should have occurred between the 2015 and 2016 contracts.
Foodservice buyers will make their case with change-in-market poultry prices and change-in-feed costs data.
The chicken price argument
The graph, “Value of 3.5-pound WOGs,” shows Midwest WOG values. Note the prices were well above $3 for most of 2014 and 2015. The 2015-16 decline is a sore spot for buyers who locked in annual values for 2016 at values close to 2015. Summer peak prices are 50 cents below 2015 and $1 below 2014 in 2016.
Prices were well above $3 for most of 2014 and 2015.
The production cost argument
The graph, “Feed cost per live 5.4-pound bird,” is the 60-day average of an 80 percent corn and 20 percent meal ration yielded to a 5.4-pound live bird. Note that feed costs actually are not showing significant declines. Much of the support stems from meal prices at the time of this article.
Feed costs are not showing significant declines.
The tactics normally used by chicken sellers include:
- Trying to prove feed costs and chicken prices are not correlated
- The buyer does not buy the “entire WOG” so a lengthy discussion of parts prices begins.
- The product bought is unique, single-sourced, and therefore immune from competitive pressure.
The foodservice poultry buyer’s reaction to these tactics:
- Feed and chicken prices are not correlated, but feed costs and margins are correlated unless chicken prices are adjusted. The buyer focuses on margins for their purchase.
- The buyer zones out and views the parts discussion as “’smoke and mirrors.”
- The buyer will start the process of finding alternative products.
To address foodservice buyers’ concerns, poultry sellers can provide alternatives. It is important that poultry sellers not necessarily get tied up in exact formulae or correlations to unique poultry parts. Without question, some assumption of live cost of poultry is assumed when the pricing is set.
A poultry seller can dramatically enhance a customer relationship by enabling that foodservice customer to benefit if poultry live costs change. For grain price risk-sharing, poultry sellers might consider:
- Rebates if feed falls below a specific level. (This only works for company-owned or co-op- managed sourcing organizations.) The rebate arrangement can eliminate the issue of raising prices should the feed markets rally.
- Price adjustment based on feed prices in the future. (Under this arrangement, poultry buyers must have shown a history of living with adverse market moves and hold to their agreements.) Quarterly price adjustments are common, but too many poultry buyers penalize suppliers for adverse market moves.
One final word of advice to poultry sellers: Beeson & Associates, Inc. consults with many foodservice poultry buyers. Their expectations are primed and (they will tell you) data-driven. And they have grown weary from the barely nominal adjustments to poultry prices in recent years. So be prepared.