March, 2006- After the 2002 Winter Olympic Games in Salt Lake City the U.S. broiler chicken industry suffered a rare setback. In 2003, the number of chickens produced was less than in 2002. The cause of the setback was to be found in political events that, oddly enough, had connections to the games themselves and the political relationship between certain large countries. A sudden reduction in the export demand for U.S. leg quarters led to low prices, which triggered the closing of some complexes.

This year could see a repeat of the experience of 2002. This time the setback will have no relation to the games themselves in Torino, Italy, unless the games were to become known as the Avian flu games. Avian flu has reduced the demand for chicken meat in most of the world, including, most notably, Asia but also Europe, the Middle East, Latin America, Africa and even, to a small extent, the United States.

Some countries are more important than others for the U.S. poultry industry, and no country is as important as Russia for U.S. exports. Fully half of all U.S. exports normally go to Russia. As this is written, the inventory of frozen chicken is rising alarmingly in Russia because of a decrease in consumption. The increase in frozen inventory is reflected in the price of leg quarters. From a high of 45 cents per pound last summer, the price of leg quarters dropped to 25 cents in December. If leg quarter prices are in the 20s by the time this article is published, it will mean that the international market continues to be weak. If, on the other hand, leg quarter prices are 35 cents per pound, health is probably returning to at least the Russian market if not the entire world market.

Osler Desouzart, the Brazilian expert on world poultry markets, has characterized the current problem as an unprecedented reduction in demand in the countries that represent the “backbone of world chicken demand.” The backbone of world chicken trade demand is made up of Europe, Russia, the Middle East and Japan. All of these areas are showing demand weakness with the only question being the duration of the weakness not the weakness itself. With the backbone of world demand weak, the only alternative markets are some areas in Central Asia, Southeast Asia, Africa and parts of Latin America that can absorb volume but only at much lower prices.

Even if export markets are very weak this year, the profitability of U.S. companies will not be in danger unless breast meat prices are also low. The price of breast meat is much more important to the U.S. industry than leg quarter prices. There are numerous examples in the past of high or moderate breast meat prices occurring at the same time as low leg quarter prices. Unfortunately, breast meat has also suffered a drop in price, falling from the unusually high price of $2.60 per pound during the Atkins diet craze of 2004 to just a dollar a pound at the start of this year. A low price of breast meat persisting into the spring would be a danger sign for the U.S. industry.

Regardless of the behavior of leg quarter prices, if deboned breast meat recovers to $1.20 this spring and then continues on to higher prices this summer, the weakness in world prices will only be a minor irritation. However, looking from the dead of winter when this article is being written, it appears unlikely that the U.S. industry will escape so easily. Leg quarter prices do, after all, have some effect on deboned breast meat prices, and the demand for all chicken could be weakening in the USA due to avian flu concerns.

In addition to demand, there is the matter of supply to consider. Unfortunately, in the face of reduced demand, supply is increasing rapidly both in Brazil, the largest exporter of chicken meat, and in the USA, the largest producer of chicken meat.

Brazilian Supply

Brazil is the lowest cost producer of chicken meat and has taken advantage of that position to capture the lion’s share of the world export market. Exports from Brazil in 1998 were just one-quarter as large as exports from the USA. However, by 2004 Brazil surpassed the USA in exports and is likely to exceed U.S. exports by 50 percent this year.

The Brazilian juggernaut is on a roll and isn’t likely to slow down. Chicken production in Brazil increased 50 percent in just five years from 2000 to 2005 (6 to 9 million metric tons). Production will continue to increase rapidly this year just due to inertia. Construction is nearly completed on several new complexes, and they will open. As a result, hundreds of thousands of additional tons of chicken meat are likely to be sent from Brazil to the world market. The results could be a significant drop in world prices, which will (temporarily) bring the increase in Brazilian production to a halt in 2007 at close to 10 million metric tons.

Large increases in Brazilian supply in the face of weak international demand will keep world chicken prices low. That is why it appears likely that U.S. leg quarters will have a hard time climbing above 25 cents this year.

U.S. Supply

Brazil will not be alone in increasing the supply of chicken this year. While Brazil is increasing production by 700,000 metric tons, the USA is likely to increase production by 445,000 metric tons (1 million pounds) as can be seen in the accompanying table. Domestic supply is likely to increase 1 million pounds or 3.4 percent with export levels flat. Per capita consumption would increase 2 pounds to 88 pounds per capita.

The domestic supply of the critically important product, deboned breast meat, will be increasing at a higher rate, 5 percent, and the domestic supply of leg quarters could increase 10 percent if exports numbers are indeed flat. Those numbers will be punishing to domestic profitability if domestic and international demand both continue to be weak.

How is it possible for deboned breast meat and leg quarters to increase at a faster rate than total chicken supply? The answer is that the USA is shifting production from generally smaller bone-in products to generally larger boneless products. This is a long-standing trend that goes back decades. The high rate of increase of deboned breast meat and leg quarters is made possible by deboning an ever larger percentage of chickens at ever higher weights and yields. In the following graphs these trends are described.

A few caveats are in order about the graphs. First, the numbers are estimates based on interviews with industry observers, since there is no public information available that provides the necessary data. Second, the graphs attempt to combine small and large deboning chickens into one average, which introduces further potential error. Despite these compromises in constructing the graphs and the resulting inaccuracies, I am confident that the trends and the rate of growth depicted are both roughly correct.

Number Of Chickens Deboned For The Front Half

In the mid-1980s, when the deboning of the front half of the chicken was just starting to use dedicated plants, there were only about 500 million chickens deboned for breast meat. That number has grown to approximately 4 billion mostly large and some small chickens today. By 2010, at the current rate of increase, the USA would be deboning 5 billion chickens of all sizes with the majority being large deboning chickens.

When chicken deboning began in earnest in the 1980s, the size of the chicken used for deboning averaged only five pounds live weight. Today, there is a range of sizes used with the largest deboning chickens exceeding eight pounds. It is interesting to note that the new complex announced by Sanderson Farms for Texas will debone a nine-pound live-weight chicken. The average weight of all deboning chickens has been rising steadily over time and will reach approximately seven pounds by 2010.

Along with rising weight comes higher yield. In the 1980s, the yield of breast meat from a five-pound chicken was only 15 percent. That number has risen steadily to the point where by 2010 fully 20 percent of the live weight of the average deboning chicken will be breast meat.

The combination of these three long-term trends results in a 6 percent yearly increase in the supply of deboned breast. However, this year may have a slightly smaller increase than normal given low breast meat prices. Therefore, I am expecting a 5 percent increase. Last year, approximately 5 billion pounds of boneless breast meat were produced in the USA. This year, an additional 250,000 pounds of deboned breast meat production is likely.

Every deboned chicken produces more than two pounds of bone-in leg quarters. In 2005, 10 billion pounds of leg quarters were produced with about half being exported. This year, 10.5 billion pounds will be produced. The production of leg quarters is also likely to increase 5 percent this year. Since exports normally take half of all leg quarters, in a year like 2006, when there is potentially no increase in export sales, the domestic market will absorb 10 percent more leg quarters.

Is 5 Percent Too Much?

A 5 percent rate of increase in the U.S. domestic supply of deboned breast, now the dominant form of chicken in the country, would not normally be a problem. It represents less than one additional pound per capita of deboned breast meat in a country that is in the middle of a trend toward boneless chicken. However, this may not be a normal year. If the following “not so good” scenario proves to be correct, a 5 percent increase would prove to be too much to sustain profitable breast meat prices.

‘Not So Great’ Scenario

•Significantly weaker world demand due to avian flu

•Russians in particular shun chicken of all kinds

•Significantly increased supply of Brazilian chicken

•10 percent more U.S. leg quarters on the U.S. market —

one pound per capita

•Weaker U.S. domestic chicken demand due to avian flu

concerns

•Increased domestic supply of U.S. red meat —

two pounds per capita

•Increased domestic supply of U.S. chicken —

two pounds per capita

All of these predictions are nothing more than predictions. In each case, a different outcome would be possible. The following better scenario would insure a profitable U.S. broiler chicken industry this year.

Better Scenario

•Worldwide avian flu concerns fade away

•Russians return to eating large quantities of leg quarters

•Brazil increases production less than

expected

•Only 5 percent more leg quarters on

the domestic market

•U.S. domestic chicken demand gains

strength

•Red meat supply is less than expected

•Chicken supply is less than expected

If the less attractive scenario proves to be true and chicken supply is high compared to demand, the total number of chickens produced in the USA may decline slightly in 2007 as supply rebalances with demand. This would again be a coincidental correlation of a chicken slowdown after the Winter Olympics. If this pattern holds, production will accelerate between 2008 and the beginning of the 2010 winter games in Vancouver, Canada.