What's the winning hand for 2009?
As grain and commodity prices tumble, the market attempts to readjust.
When crude oil reached $147 a barrel and corn topped $7 a bushel last summer, what was your prediction for the prices of these commodities at the start of 2009? I can honestly say that I believed that both corn and oil prices would fall from those lofty heights, but I never dreamed that corn would fall well below $4 a bushel and crude would sink below $40 a barrel. Had I been forced to make business decisions last summer based on my predictions of what these key commodities were going to cost and what that would mean to my company, I'd probably be out looking for work now.
The data presented in this Top Company issue of WATT PoultryUSA gives a peek behind the curtain at how individual poultry companies read the tea leaves last summer and fall and how they decided to respond. We have all read the reports of Pilgrim's Pride Corp.'s incorrect guess that corn prices would stay above or at least near record high prices through the fall harvest season. The company put the cost of its error at around $100 million. According to industry sources, they were not the only company that made the same guess and made similar, but smaller, plays on the commodity exchanges.
Some companies looked at grain prices last summer, ran these prices through their systems and just decided it wasn't worth raising as many birds as they had originally planned. For most companies, this decision is a painfully agonizing decision to make, but for others, their banker might have made the decision for them. It doesn't matter who makes the decision, the net affect is the same, fewer pounds make it to market. Everyone in the industry is happy when someone cuts back production, as long as it isn't them.
Level of exposure that individual poultry companies have to commodity meat markets definitely plays a role in analyzing how to respond to high grain and other input costs. Being a supplier of meat for someone else to further process was a very profitable niche for turkey processors from 2005 through 2007, but it wasn't as attractive in 2008.
Selling chicken breast meat on the open market was an even less rewarding place to be in 2008 than selling turkey breast meat. Several broiler companies started bringing the weights down on their deboning birds in the second half of 2008, ending an upward trend that has been going on for years.
Perhaps the most interesting response to last summer's market conditions was taken by one turkey company. According to industry sources, this company looked at the combination of high corn prices and relatively low-priced breast meat in the summer and figured it would be a better time in 2009 to be a buyer of breast meat than it would to be a seller. So, this company cut its own production and bought breast meat to meet its further processing needs. As it turns out, this play may be one that pays off handsomely, but you never know.
In my short 22 years of working in and around the poultry industry, I can remember a couple of times when deboning operations shut down because breast meat prices were just too low. It always seemed that the breast meat price jumped up just weeks after the shackles quit moving at these plants. The U.S. broiler and turkey industries are counting on this kind of a rebound happening as a result of the cutbacks already undertaken. One thing is certain, in a free market system; low prices are the cure for low prices.
In some cases, the prices received for poultry meat by processors in the U.S. were not low when looked at from a historical basis, but they were not profitable because of high grain costs. If the cutbacks reported in this issue are not enough to bring meat prices up to profitable levels, then more cutbacks will follow.
Every player at the table in poker is dealt a different hand. The same can be said for poultry companies, each company's circumstances are somewhat different. I don't think that there is just one winning play for this year, there could be several.