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The U.S. chicken industry is poised to return to profitability in 2012, after 14 months (and counting) of financial losses brought on by high grain costs and weak consumer demand. To its credit, the industry is working its way back to profits the DIY way – not by waiting for an improvement in demand or lower feed costs but by cutting egg sets and pullet placements.
Joe Frank Sanderson Jr., CEO of Sanderson Farms, told analysts at the J.P. Morgan SMid Cap Conference in late November 2011 that the chicken industry would return to profitability through production cuts in 2012 with or without an improvement in feed costs because producers cannot withstand further financial losses.
Although Sanderson Farms and a few other industry companies reportedly continue to have strong balance sheets, the financial pain has been widespread in the industry. “From bankers we have heard that industry balance sheets got very bad, very quickly in April and May ... Industry members are in bad enough shape that they have to do whatever they can to return to profitability,” he said.
Counter-seasonal rise in chicken prices
USDA reports showed egg sets for November-December 2011 broiler production down year-over-year as much as 7% and pullet placements down 9% year-over-year, and the chicken industry has already benefited from counter-seasonal price improvements. As Sanderson Farms President Lampkin Butts explained, improvements in chicken prices in November 2011 were significant not for their amount but for the fact that they occurred in a typically weak market period.
Sanderson pointed to the fact that the industry has been reducing egg sets since June 2011. Referring to the industry’s losses, he said, “I believe the worst is behind us.” He predicted that the counter-seasonal price improvements seen in November 2011 would accelerate after Christmas.
Positive outlook for 2012 and 2013
Barring extraordinary negative economic events, Sanderson indicated the industry appears to be on a footing to be profitable in 2012 and 2013. “I can’t see the future,” he said, “but I know what comes after a bad financial period like the industry has been through. Because of economics, that is what has to happen.” There should be an improvement in industry economics in 2012, “and 2013 could be a better year if the smaller pullet flock continues into 2013,” he said.
Outlook not contingent on low-cost grains
Sanderson indicated his outlook is not contingent on low-cost grains or improved consumer demand. “I think we are going to have high grain prices again in 2012,” he said. And, he added, “I do not believe we are going to get any improvement in demand in 2012.”
However, the possibility of somewhat lower grain prices in 2013 sweetens the longer-term outlook. He explained: “There have been two bad corn crops in a row. The odds are that we ought to have lower corn prices going into 2013. If the corn harvest is around 94 million acres and there is trend-line yield of 161 bushels per acre, there would likely be around a 1.9 billion bushel carryout. That means corn with a ‘4’ in front of it.”
Also helping the industry’s longer-term financial outlook would be a rise in consumer demand. “At some point – in 2013, 2014 or 2015 – there will be 20 million to 25 million people who are now unemployed or underemployed returning to the workforce. That is going to happen over a period of time, and our industry could be sitting there at that time with a smaller breeder flock and some plants shuttered. So I am looking out over the next four or five years, and I want to have some new plants running when that happens.”