High feed costs are growing problem for the broiler industry in 2021. 

In a WATT Poultry Chat interview, Mark Jordan, executive director of LEAP Market Analytics, examined what's driving current feed prices and explained what the effects of higher than normal prices may be on the industry. 

He said lower-than-normal crop yields in 2020 and drought conditions in some of the corn growing regions of the U.S. are driving prices upward. Higher than normal corn costs can be offset by higher chicken prices but runaway feed prices would start have a serious effect. 

Austin Alonzo: I know today you wanted to talk about feed prices and specifically, what kind of impact do you see feed costs having on the boiler industry, the rest of this year and beyond?

Mark Jordan: From a glass half full approach, the storyline has been strong demand for chicken breasts and wings and that's really been a boon to the broiler industry. From the glass-half-empty perspective, the feed costs situation has really become a pressing threat and could be even more so as 2021 unfolds. 

If you go back and trace some of what's happened, of course, the industry has enjoyed some relatively low and stable feed costs the past few years if you go 2015, 2016, 2017, 2018 and 2019. And then last summer, when there was the big derecho that swept through the Midwest, Iowa was specifically targeted that seemed to kick things into gear. It took a little bit of a chunk out of 2020 crop production. And then, as USDA was making its final assessments of last year's crop, the total acreage, specifically the yield number started coming in back a little bit just backing off a little bit, lowering those production totals. All this was happening as usage levels, specifically export movements, were looking pretty strong. So you had this situation where you know numbers start to tighten up on the supply side and the market increased noticeably in response. 

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Now moving forward. Here are balance tables, looking at the past few marketing seasons. We're right now in the middle of the 2020 and 2021 marketing season and now starting to look ahead to 2021, 2022, some concerns unfolding. Of course, for this marketing season if you compare the past few and and kind of hone in on the bottom line number of ending stocks, the past few marketing seasons: Corn, we finished up those market years with around 2 billion bushels of corn a little bit more in some cases. This year, looking at a carry out down around in the 1.2 to 1.4 billion range. So really tightening things up. And of course, as we've talked about, corn prices have increased in response and threatened to go even higher. 

One of the things that's the big concern area was the USDA's prospective plantings report that came out in late March that had crop acreage a bit below expectations. On the corn side, we had planted acreage at 91.1 million acres. Now the key thing to remember here is this survey was conducted with intentions as of March 1. So when we talk about this is a preliminary view, this is extremely preliminary and early in the process. So I've got plugged in, and we can see here, I've got my expectations as USDA starts to open things up and take a closer look at the 2021/22 marketing season. They'll do that in the next WASDE report, but I believe market signals will bring a bit more acreage into the fold. And we'll see that final number when the USDA does the June survey bump that up a bit. 

That said, we're in a situation where there's really a lot of pressure on yields to be robust, record large in fact, and I'm a little bit skeptical, we see that my numbers are probably on the low end when we talk about what a trend yield might be I kind of skew that back a little bit and that's going to leave us in a situation as we look ahead to the next marketing season to keep things on the tight side.

We can look ahead to the next chart here just looking at that ending stock situation, stocks-to-use ratio and looking at the implications for price. Of course, as we would expect as you skew that number tighter that's going to point to higher prices and we talked about a situation where you're looking at a stocks to use ratio of 8% give or take. That argues for corn prices firmly above $5 potentially marketing your average looking ahead to next year, maybe around the $6 area. 

Wrapping up here, I think the one concern area as to why there's pressure on the yields to be robust, to kind of solve this supply situation and why we may not get it is the drought situation. Looking at the drought monitor, of course, a lot of that's concentrated in the southwest. But as the map indicates you're seeing a lot of spread there into Texas, the western part of the Corn Belt, the upper plains. So drought-like conditions are really somewhat pervasive. There's a situation where, if that doesn't remedy itself, somehow with some precipitation, we're going to be looking at some pretty tight yield or pretty weak yields, to help solve this supply situation. 

So I think, the chicken industry and other grain buyers are going to be looking at some pretty high prices. If we see corn prices stay around, $5.50 or $6, that's high. That's maybe somewhat manageable with chicken prices so high. If we start seeing a kind of a runaway move to $7 or $8. It's going to present some problems, and there's definitely a risk that could happen.
 

This transcript edited for length and clarity.