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Has the US poultry industry turned the corner on high feed costs?

September 16, 2011

The U.S. poultry industry may have begun to turn the corner on high feed costs. Corn futures for delivery in December reached a high near $7.80 a bushel in late August, while the price September 20 is closer to $7.05, despite USDA’s September 12 downward revision in the corn production forecast. Will the U.S. poultry industry look back a year from now and be able to say this was the downward turning on $7-a-bushel corn prices?

Whether or not this is the turning point for high corn prices, there are those who say it is only a matter of time. They say $7-a-bushel corn is not sustainable, especially in a sagging global economy in which demand for food and animal feeding ingredients won’t support $7- to $8-a-bushel corn. Commodity speculators are calling it a “corn bubble” and are shorting corn in exchange-traded funds. Buyers for food and poultry production use the term “demand destruction” to describe the effect of $7-a-bushel corn.

$7-a-bushel corn not sustainable 

Dr. Paul Aho writes about the prospects for lower grain prices in the October issue WATT PoultryUSA: “Although grain prices will never return to the levels of five years ago, the current corn price of $7 per bushel is unsustainable. Corn will eventually fall because at current levels demand is suppressed (lower chicken, beef and pork production, as well as less ethanol), while at the same time corn production is stimulated all around the world. 

“The only thing holding back a fall in the price of corn is the predicted poor harvest in the U.S. for a second year in a row. By crop year 2012-13 the price of corn should finally fall to $5 per bushel as an average over the entire year,” he writes.

Operating in the ‘here and now’ 

Whether or not high corn prices subside at some point in the future, the poultry industry is in the worst predicament of all the proteins in the here and now, according to Tim Brusnahan, Brock Associates. “The cattle industry is at 40-year lows in inventory, and the pork industry has benefited from having China as its biggest and best customer. Poultry doesn’t have those advantages.

“So the federal mandate for corn ethanol has thrown the entire supply rationing function on one sector of protein – poultry. I’m not so sure that the industry has truly figured out what they want to do and how they want to scratch and fight their way out of it just yet,” he said in a phone interview.

For now, the U.S. chicken producers are cutting egg sets and appear set on a course to reduce production by about 6% in 2012. Some poultry producers also are said to be considering the feasibility of substituting wheat for corn in feed rations. Corn recently traded on par with wheat for December delivery, a rare phenomenon last occurring in 1983.

Corn prices in flux for now 

 
There is a mix of influences on corn prices. There is speculation that USDA will make a downward revision in its estimate of harvested acres of corn in its October report. Meanwhile, corn now in the fields in the Upper Midwest appears to have avoided any substantial damage from freezing weather earlier this week. And while export demand for corn had stalled when prices were near $7.45 a bushel, some export orders resumed when prices fell to near $7 a bushel.

For now, there are both upside and downside limitations for corn prices. Analysts have said there may be some support at the 50-day moving average, which is just above $7 a bushel. 

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