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News and analysis on the global poultry
and animal feed industries.
on June 23, 2009

Grain prices, currencies tilt landscape

The economic impact is now visible on companies and in markets.

Last month's column dealt with our nation's misguided energy policies (ethanol subsidies) that are driving up grain and food prices while netting little or no positive impact on energy supplies and actually add to our planet's environmental woes. This month, the economic impact is visible on companies and in markets.

While Sanderson Farms eked out $6.2 million in profits in its first quarter, Pilgrim's Pride reported a net loss of $32.3 in the first fiscal quarter, and Tyson Foods reported quarterly earnings fell 40 percent, at $34 million, as its beef and chicken businesses were weighed down by higher costs. Saying it expects feed costs for its chickens will be up by more than $500 million in fiscal 2008, Tyson indicated it would raise meat prices to offset higher feed grain costs. Meanwhile, Cagle's reported a loss of $1.77 million for its third fiscal quarter; it, too, indicated that feed ingredient cost increases had taken their toll on profitability.

In response to these economic pressures, poultry companies are shutting down plants, shedding less profitable product lines and attempting to raise prices. Pilgrim's Pride, for example, is closing its chicken processing complex in Siler City, N.C., and six of its 13 distribution centers. The actions are part of a plan to curtail losses amid record-high costs for corn, soybean meal and other feed ingredients and an oversupply of chicken. The company announced that it is reviewing other production facilities for potential product mix changes, closure and/or consolidation. Tyson Foods announced the closing of its poultry cooked products plant in Wilkesboro, N.C., due to the discontinuation of the product line produced there.

Also last month, Pilgrim's Pride announced the sale of its turkey production facility and distribution center in New Oxford, Pa. While the move is part of a longer-term strategy to focus company resources on chicken, current industry economics may well have played a role in the timing of the sale.

Not every move of these companies is solely due to surging grain prices. More expensive grains are playing a big role in higher costs across the board, but other forces are also at work, including higher energy prices, a weaker dollar and poor credit markets. Cagle's, for example, recently announced that the group consisting of James Douglas Cagle, the company's president and chief executive officer, his two sons, and a limited liability company controlled by members of the Cagle family has given notice that it is withdrawing its offer to acquire approximately 36 percent of the company's stock. The principal reason cited for the withdrawal of the offer was the deterioration of credit markets.

These forces almost certainly played a role in Tyson Foods' recent fumbling of the acquisition of the Brazilian poultry company, Pena Branca. At the last minute, Tyson lost out to Brazil's Marfrig, which bought Pena Branca and another poultry company, DaGranja. The weak U.S. dollar, the strong Brazilian Real and higher grain prices in Brazil, all worked against Tyson's position.

The very same factors, on the flip side, helped Brazilian meatpacking company JBS SA last month acquire the USA's third-, fourth- and fifth-largest meatpackers to potentially roll these into Swift & Co., which it acquired last year. These latest acquisitions are subject to regulatory approval. JBS, which has operations worldwide, is already the world's largest beef producer, with around $12 billion in annual revenue.

Shares of Sanderson Farms, Pilgrim's Pride and Tyson were all up as this was written. Maybe there is something to the theory that high grain prices are good for poultry industry profits. It looks like we are in for a sustained test of that theory.

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