Great chicken crisis of 2008

The similar stories of Pilgrim's Pride and Sadia share the results of the unusual stress for the world economy and for the world's chicken companies.

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In September, the largest chicken company in the U.S., Pilgrim's Pride, and the largest chicken company in Brazil, Sadia, were both shaken in the "great chicken crisis" of 2008. The story unfolded in the performance of the stock of the two companies.

One year ago, Pilgrim's stock traded at $40 per share. As the industry got caught in the whipsaw of rising grain prices and falling chicken prices, the value of Pilgrim's stock sank throughout the year to reach $14 at the beginning of September. Then, in a dramatic development, the stock fell to $2 per share in just a few days, a loss of 95% in 12 months. The market value of Pilgrim's Pride (price per share times the number of shares) dropped from $3 billion to just $200 million. The sudden drop in September came about, in part, because of an untimely bet on the price of corn which led to hedging losses. The unfortunate timing of the corn purchase was compounded by the overall weakness in the chicken meat market in the U.S. and the difficulty of raising additional credit in the market downturn. The survival of the company was still in doubt at time of press.

Sadia was another company in a betting mood. The largest chicken company in Brazil made an untimely bet on the value of the U.S. dollar (they thought it would go down), which caused the company to lose hundreds of millions of dollars. The stock, which was as high as $26 per share earlier this year, fell to just $7 per share after the currency debacle. The market value of Sadia dropped from $1.8 billion to $500 million.

What these stories have in common is that they took place during a period of unusual stress for the world economy and for the world's chicken companies: The great world chicken crisis of 2008. It was a crisis that brought together high grain prices, low chicken prices and financial market chaos.

How will the crisis be resolved?

The resolution of the crisis will come about first by production cuts and eventually by an end to the economic downturn. Thanks to the economic downturn there is a glut of meat in general. Chicken meat could not clear the market profitably in the quantity that was being produced by the U.S. or most of the world in 2008. In 2009, the total production of U.S. chicken meat is likely to decline, a highly unusual (and temporary) turn of events. In the current recession, consumers will be eating out less and buying more of their meat in supermarkets. The total consumption of chicken meat per capita will decline.

According to U.S. Census Bureau data, grocery sales are currently increasing more rapidly than foodservice sales. Food service sales, after rising at a blistering pace of over 8% in 2006, fell to 4% in 2008 and may fall to as low as 2% next year. Grocery sales are increasing more rapidly as consumers switch purchases from restaurants to supermarkets.

Deboned breast to suffer most

If grocery store sales continue to increase at the expense of food service sales as expected, the surplus will be most acutely felt in deboned breast meat and the further processed products made from deboned breast. As consumer income increased, chicken companies profited by performing more of the tasks that consumers and restaurant owners would prefer not to do themselves.

In the current economic environment, chicken companies may need to subtract value from chickens. An example can be found in Mexico where some lower income consumers are switching to the purchase of live chickens from eviscerated whole chickens. In many countries consumers are opting for smaller chickens.

Similarly in the U.S., some consumers who are pinched for income will be substituting bone-in eviscerated chicken from the supermarket for the boneless breast they previously purchased in restaurants. This unusual situation will undoubtedly end within a year or two.

By 2010 (2011 at the latest), the U.S. industry will, once again, need to add value to chickens with more value-added products made from deboned breast meat, Mexican producers will need to eviscerate more chickens and the world weight of chickens will increase once again.

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