Earlier this year, the two most important export markets for the U.S., Russia and China were closed to U.S. chicken exports. By the time this article is published export markets may be returning to normal. Nevertheless, it is useful to consider how important these markets are to the U.S. chicken industry.

The U.S. produces about 35 billion pounds of chicken meat and exports 20% or about 7 billion pounds. Most exports are leg quarters and paws. Russia imports 1.5 billion pounds of leg quarters, while China imports a billion pounds of paws and a half a billion pounds of leg quarters. Together, the two countries took 40% of U.S. exports and 8% of total U.S. chicken production last year.

Scale of business

Given the surging domestic Russian production of chicken, U.S. exports to Russia are likely to diminish in the next several years even without a trade dispute. However, it is improbable that exports fall from 1.5 billion pounds to zero in just one year. A more likely scenario is one of a phase-down over the next two to four years.

Chart 1: Chicken production in Russia

Equally puzzling is the sudden desire of China to reduce the imports from the U.S. of paws from one billion pounds per year to zero. Finding one billion pounds of paws in other countries would require an increase in paw harvest from 5 billion chickens and that new harvest would have to be from mostly large deboning chickens, the paws that the Chinese prefer.

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The zero scenario

In the unlikely scenario where Russia and China eliminate U.S. chicken leg quarters and paws, “cold turkey,” the effect on the U.S. chicken industry would be profound. The price of leg quarters would fall and paws would become virtually valueless in the U.S. Although chicken breast meat would not be directly affected, it would be indirectly affected. With the value of paws and legs falling, breast meat would have to assume more of the burden of the cost of producing chicken. The price of deboned breast meat therefore, one way or another, would have to rise.

Chart 2: Break-even prices 2010

If leg quarter prices were to average 30 cents this year instead of 40 cents because of trade problems, deboned breast meat would have to be 28 cents higher to break even (assuming wings at $1.50, corn at $4 per bushel in Chicago and SBM at $275 per short ton and the 12 City price at 75 cents). The break-even price of DBB is $1.14 with 40 cent leg quarters and $1.42 with 30 cent leg quarters.

Economic impact

Current production levels combined with sharply reduced exports would soon lead the industry into losses. The end result would be a drop in production by approximately 4%, a trim similar to that of last year. In other words, the loss of Russia and China would have an effect on the U.S. chicken industry roughly similar to that of the 2009 recession, the worst recession since World War II.

This worst case scenario can be avoided or mitigated through several means. Alternative markets are, of course, the obvious solution. Another possibility is that through diplomatic channels the real causes of problems are resolved. Since chicken is a particularly visible manifestation of the United States (who would have guessed?), it is a preferred target of retaliation for slights real and imagined. The crisis may blow over given the difficulty of alternative procurement on the part of Russia and China. Finally, in some cases, U.S. chicken can fill in for chicken which would now go to Russia or China. In other words, some chicken may follow a circuitous route to a final destination.