High and rising grain prices are taking a toll on the world’s chicken industry. Two examples are Townsends in the U.S. and Doux in France. High grain prices contributed to the Chapter 11 bankruptcy of Townsends Inc. in the U.S. last year and to continuing economic distress at Doux of France this year.

Townsends declares bankruptcy  

Townsends, the 16th largest chicken company in the U.S. with a weekly slaughter of 2 million chickens at two complexes declared Chapter 11 bankruptcy on December 20th. “The price of poultry products decreased significantly due to the historic economic downturn and oversupply while feed costs rose to record highs,” Chief Financial Officer George C. White said in court papers, the same conditions that sent Pilgrim’s Pride into bankruptcy two years earlier. Townsends was able to withstand the initial economic blow two years ago but succumbed to this follow-up distress.

Townsends was a family-owned company founded in 1891 by John Townsend as a lumber company. In the 1930s he turned his focus to live poultry along with his son Preston. Along the way, he served as Governor and Senator of Delaware.

Preston Townsend planted corn and soybeans in the 1950s, built a soybean processing plant and, in 1957, a poultry processing plant.
In 1986, under the direction of Coleman Townsend, the company expanded by purchasing processing facilities in North Carolina and Arkansas.

Three strikes: Breast prices, grain costs, debt  

The average weight of a Townsend broiler is a high 8 pounds which indicates that the company specialized in large-bird deboning. The collapse of deboned breast meat prices last year combined with rising grain prices and a large debt load sealed the fate of the company.

Peco, Omtron purchase assets  

In February the assets of the company were auctioned off by the bankruptcy court. Peco Foods acquired the Arkansas complex for $51 million while Omtron purchased the North Carolina complex and the headquarters in Delaware for $25 million and the assumption of certain liabilities. Peco Foods, based in Tuscaloosa, Ala., becomes the ninth largest chicken company, surpassing Foster Farms with this acquisition. Omtron, an affiliate of Agroholding Avangard of the Ukraine, is a newcomer to the U.S. chicken industry.

Doux S.A.: Corn prices hurt even pioneers  

Meanwhile, Doux S.A. of France, the largest producer of poultry in Europe and a leading exporter with annual sales of US$ 2 billion per year is also facing financial distress similar to that of Pilgrim’s in 2008.

The company operates a network of plants chiefly in France and Brazil but also in Germany, Spain and Switzerland. It was founded in 1955 by Pierre Doux when he opened a chicken plant and became the primary supplier of frozen chickens to French supermarkets. Because of the early adoption of freezing technology the company became an early pioneer in the export of chicken most notably to the Middle East. Charles Doux took over from father Pierre and continued the expansion of the company in Europe.

Fearing the loss of export markets due to the effects of the GATT trade treaty which reduced export subsidies, Doux made the bold move of expanding into Brazil. In 1998, Doux acquired what was then Brazil’s leading poultry processing company, Frangosul. By 2002, Brazil accounted for half of the company’s production.

Bird flu in 2006 had big impact  

The bird flu problem of 2006 was more profound in Europe. In some countries, chicken consumption fell over 90% for weeks at a time. In 2008, Doux suffered along with the rest of the world’s chicken industry with high grain prices and now with high grain prices once again. Like Pilgrim’s in 2008, high debt levels put a strain on the company.

At the end of 2009 (the latest numbers available) Doux had $472 million euros of long-term debt and only $54 million euros in shareholder equity. In November, Fitch assigned Doux a long term default rating of B- , a relatively low rating. The Fitch report states, “the rating reflects the low profitability of its domestic European and Brazilian operations and captures the inherent volatility in cereal costs and international poultry prices.”

Corn prices continue to punish industry  

The stress on companies like Townsends and Doux (as well as many other companies) is caused to a great degree by high and persistent grain prices.

Corn prices are likely to average $5.85 per bushel in Chicago for crop year 2010-2011. For comparison, corn averaged just $4.70 per bushel in the horrific crop year 2007-2008.

In this, the highest cost year ever for grain prices, the stress on the world’s chicken companies is brutal to all and fatal to some.