Outlook for 2010: Gauging poultry’s recovery

The U.S. poultry industry suffered its worst financial performance in history in 2008, brought on by a recession of historic proportions and corn costs that peaked at $8 a bushel. Cuts in broiler and turkey production in 2009 brought modest profitability for most broiler producers but producers of commodity turkey products did not get the hoped for uptick in prices. Both sectors are struggling with weak consumer demand as a slow recovery gets under way. What’s ahead for 2010?

There’s a tendency for strong recoveries to follow deep recessions, but the consensus view among U.S. economists is for something different in 2010. The average forecast of 52 economists surveyed by Blue Chip Economic Indicators calls for growth in real domestic product in the U.S. of 2.7% over the next four quarters, with the annual rate in any single quarter no greater than 3%.

Gauging the recovery

WATT PoultryUSA interviewed poultry industry leaders and economists, who shared their forecasts for 2010 grain prices, poultry production and profitability. All agreed that demand for poultry won’t strengthen significantly until there’s substantial improvement in the U.S. economy, especially a reduction in unemployment, which is now above 10%.

Sue Trudell, vice president, EMI Analytics, said, “I don’t think there will be a fast, V-shaped recovery from this recession. There are overhanging financial problems in the housing market and unemployment issues that won’t be quickly fixed.

“I believe the unemployment rate will get higher before it moderates, which means spending will be constrained in some consumer sectors. These problems won’t be solved until 2011 or 2012. I’m hopeful that by the summer peak demand season for chicken there will be more meaningful recovery, particularly in the foodservice area. But the first six months or so of 2010 might be challenging,” she said.

Echoing the concern over structural problems in the economy, Bill Lovette, president, Case Foods, Troutman, N.C., said consumer spending and demand for poultry is likely to continue to be dampened by high unemployment. Like Trudell, he points to consumer debt as the culprit.

“Mortgage debt as a percentage of GDP in 1992-93 was around 40%. Currently, that ratio is over 70%. The consumer has a big cash flow problem. That has put a lid on discretionary spending, which one reason that demand for consumer goods, including poultry, is down,” he said.

Unemployment, recently at 10.2%, won’t improve quickly, in Lovette’s opinion. “Forecasts out to 2013-14 show unemployment down only to between 6% and 7%. The latest rise in unemployment started between 5% and 5.5%. The unemployment rate is double that now, and it’s going to take between two and five years to get that number of people reemployed. This will be a damper on consumer spending until we get back to relative full employment of around 4% to 5%,” he said.

A more optimistic view

Poultry industry consultant Paul Aho offered a more optimistic view. “My bias would be for a little higher growth in 2010 than what economists have been calling for,” he said. “Of course, when the comparison is to a very bad year like 2009, it’s not too hard to get 3% growth. So we may experience better than 3% growth in 2010 and then be disappointed in 2011 when the comparison may be to a year that registered growth.”

Bill Roenigk, senior vice president and economist, National Chicken Council, and others interviewed, however, see the Blue Chip forecast as too rosy. “The outlook of the economists for growth in real domestic product of 2.7% for the next four quarters is a bit more robust than I foresee,” he said.

Sharing concern about a lack of job creation in the general economy, John Prestage, CEO, Prestage Foods, said, “I am not optimistic about economic recovery in 2010. New jobs, other than government created jobs, are not occurring yet. The economy is based on consumer spending, and that won't happen with high unemployment.”

Poultry industry economist Tom Elam pointed to indications of why a quick, robust recovery is unlikely. “Consumers have gone from saving about 1% of their incomes to about 6%, which means that the money is not being spent on automobiles, houses and food. Another indication is the number of hours worked per week by the U.S. workforce is at a record low. The numbers of hours in the workweek for existing workers will pick up before companies start hiring.”

Elam summed up the near-consensus view: “Don’t expect a big turnaround in consumer demand in 2010, and if the supply of poultry increases producers will pay the price.”

Industry fundamentals

While the industry’s broiler and turkey sectors must adjust to weak consumer spending, they start on different economic footings headed into 2010.

Turkey production cutbacks in 2009 did not produce the hoped for uptick in prices. John Prestage said more production cuts are needed in 2010. “Certainly, the 8% or 9% reduction in supply in 2009 has added some strength to turkey prices. However, commodity turkey prices are still not high enough for many firms to be profitable. For the most part, profitable turkey companies are ones that own further processing. I believe at least another 5% reduction in the turkey is needed for commodity prices to be profitable again,” he said.

Broiler production cuts of 3% to 4% in 2009 resulted in higher prices and restored profitability to many firms in the sector.

Lampkin Butts, president and COO, Sanderson Farms, said, “The margins the industry attained in 2009 were a reflection of the cutbacks in production. I think 2010 is going to be profitable as long as the supply remains cut back. I don’t believe demand will be strong enough for the industry to operate at full production,” he said.

Broiler industry profitability was good enough – particularly in the first three quarters of 2009 – for companies to repay some debt and perhaps put aside some capital for some economic bumps in the road that may be ahead. Margins were reduced, however, in the fourth quarter, and analysts say there is still healing needed in the industry’s balance sheets.

Production restraint in 2010

Only modest increases in poultry production will occur in 2010, according to the projections provided by the people polled for this article.

“My projection is for 2010 broiler production to be up 1% and turkey production down 2%,” Tom Elam said. “Broiler production should be down a couple of percentage points in the first half and maybe up 4% in the second half.

“My projection is for turkey production to be down 3% to 4% in the first half and up 1% to 2% in the second half,” he said.

Tom Hensley, president of Fieldale Farms, said he believes broiler producers will show production restraint in 2010. “I think that 2010 production will be at about the same level as in 2009. While livability and hatch is up, pullet placements have not been high enough to allow an increase in production.”

While others agreed that the industry will show production restraint, they predicted a modest increase is broiler production in 2010.

Bill Lovette said, “There might be a 1% to 1.5% increase in broiler production in 2010 but in my opinion no more than that.”

Sue Trudell also foresees slow growth in broiler production. “I expect growth in the neighborhood of 1.5% to 2% in 2010 and not getting back to 2008’s record high. We won’t get back to 2008’s production level until possibly 2011 or more likely 2012,” she said.

Lovette predicts the restraint in broiler production will lead to lower frozen inventories. “The broiler industry had low frozen inventories throughout 2009, but I think they are going lower in 2010. This is going to help broiler prices.”

Turkey and pork inventories, however, will continue to hang over the meat markets. “Turkey production has been restrained – even more so than chicken in 2009 – but turkey inventories are much higher. Also, there will continue to be a glut of cheap pork on the market, probably for another six to 12 months,” Lovette said.

Profitability outlook

The predicted production restraint, if realized, should keep broiler and turkey firms out of the red in 2010, according to Tom Elam. “For the year, I have turkey producers about breaking even to a slight profit of 1 to 2 cents a pound on a ready-to-cook whole-bird basis. And broiler producers, I project, will average profits of about 2 cents a pound, which is well below what the historical average.”

John Prestage provided a similar profit outlook for the turkey industry. “I think turkey producers will break even or make a slight profit on commodity production if feed prices stay near present levels. Further processors should experience higher profitable,” he said.

Paul Aho predicts a bumpy start to 2010 for broiler profitability but a smoother ride as the year progresses. “I foresee the U.S. broiler industry losing a couple of cents per pound in the first part of 2010, but making high, single-digit returns by the summer and certainly being profitable by the end of the year.”

Bill Roenigk offered a philosophical outlook on profitability in 2010. “More than making a prediction, it’s more of a hope that 2010 can be a year of normal profits that will allow the industry to do things needed for the longer term. Companies need to continue building up reserves and repaying debt. They also need to make investments for the future in new products and new technologies.”