Here’s the question that is the elephant in the room for chicken processors: Are production cuts sufficient to restore chicken industry profitability “in the pipeline?” With many chicken processors losing as much as 4 to 5 cents on every pound processed, survival for some companies may depend on how quickly and deeply the industry cuts production.

Profitability factors in flux 

The truth is that nobody knows for sure about the profitability question as factors impacting future feed costs and the chicken supply swirl. In recent days, the corn crop in the Midwest, for example, was first scorched by sweltering heat during its pollination stage, which is crucial to yields, but then soaked by cooling rains. The same heat wave reportedly reduced the grow-out performance of industry flocks by reducing live weights and increasing mortality, which would be expected to help reduce the supply of chicken.

For now, oversupply conditions are taking their toll on boneless-skinless breast meat prices, which were averaging $1.10 a pound recently, according to one report. That is a historically low price for the typically strong July selling period. The current oversupply of chicken, in fact, is overwhelming any benefit from high red meat prices and the typical seasonal strength.

Cutting process has begun 

USDA data shows that the supply cutting process has begun, but it’s in the early stages. Broiler breeder slaughter in the fourth quarter of 2010 was up 6.3% and in the first quarter of 2011 was up 5.4%. Analysts expect this trend to continue through 2011 and 2012.

Those breeder slaughter increases haven’t worked their way into USDA’s hatchery supply flock data. A small increase in hatchery supply flock is expected in the data for the second quarter of 2011, and the current oversupply of chicken is expected to continue for a time. Initially, as the breeder flock is cut, it becomes more productive, which sets up potential increases in the chicken supply. Furthermore, chicken live weights could continue their upward trend, which adds pounds to the total chicken supply.

Differing outlooks 

There are hawks and doves in forecasting the supply and demand of chicken and industry profitability. Analysts at Deutsche Bank, for example, recently indicated they believe sufficient production cuts will occur to bring higher-than-normal industry margins by the second half of 2012. On the hawkish side, a well-known profitability index, which uses industry average cost, production and sales mix, showed losses of about 3 cents a pound in the first quarter of 2011 and near breakeven costs and returns in the second quarter. But the index dips to losses of about 1.7 cents and 2.5 cents in the third and fourth quarters of 2011. For 2012, the index shows profitability barely above the breakeven level by the second and third quarters of 2012 before falling to a loss of nearly 2 cents in the fourth quarter.

For another view on chicken supply and demand, watch the video: Chicken marketers upbeat on prospects for supply cuts.