In a cycle of profitability for the U.S. broiler industry, the burning question is: How much longer the good times can last?
Input cost pressures ahead
As the biggest and most volatile cost component, feed can make or break a bottom line. Since 2015 broiler feed costs are relatively stable, averaging between $0.18 and $0.21 per live pound produced, according to LEAP Market Analytics estimates.
The threat of feed costs soaring back close to 2012 levels anytime soon appears remote. Nevertheless, domestic channels aren’t likely to be as well-supplied with key feed inputs in 2020 as they have been the past couple of years.
In 2020, the industry should prepare for a feed cost increase of at least 3% to 5% from 2019. Additionally, labor costs are experiencing more upward pressure than usual. Minimum wage increases went into effect in several states to begin the year and persistently low unemployment has created stiff competition for workers.
Record supplies threaten prices
The threat posed by rising feed costs is overshadowed by supply-side developments likely to have negative consequences for chicken prices.
Thanks to newly-added capacity, ready-to-cook chicken meat production in the U.S. increased nearly 3% to 2019 from 2018. Production is expected to rise another 3% in 2020, to more than 45 billion pounds.
While the export outlook has brightened, this kind of surge in output is expected to stretch domestic per capita availability of broiler meat even further into record territory in 2020 to 68.5 pounds (boneless weight).
It will be difficult for the demand side to keep up, especially with so much beef and pork available. LEAP Market Analytics is forecasting a 4% decline in the weighted average value of chicken this year from last, with the risk of even more downward price pressure if those export opportunities fail to materialize.
Profit margins to weaken in 2020 but remain positive
Despite higher costs and lower prices, U.S. chicken companies are still expected to see positive net returns of between $0.03 and $0.04 per pound (on an RTC basis) overall this year. That would represent a noticeable drop-off from 2019 that featured average net returns of more than $0.08 per pound but still far better than 2018 with an average profit margin of less than $0.01 per pound.
Profit margins in the US broiler industry were relatively strong last year but appear headed lower in 2020.
The bad news for industry players is that profitability, when viewed strictly on a year-to-year basis, is trending in a negative direction. However, the good news is that margins are poised to remain comfortably positive for almost the entirety of 2020, continuing a successful pattern of positive average annual net returns in place since 2013.