Poultry Profits Absent Despite Cheaper Feed
Last updated Wednesday, October 8, 2008 4:48 PM CDT in Business
By Kim Souza
THE MORNING NEWS
SPRINGDALE -- Chicken companies continue to bleed losses despite a 47 percent reduction in corn prices and a 42 percent price-drop in soybeans -- the two major feed ingredients that reached record price levels this summer.
Much of the poultry industry groaned about excessive grain expenditures that were fueled by strong demand from a burgeoning ethanol industry and Wall Street's index commodity fund speculators, said Gene Martin, commodity analyst with the Arkansas Farm Bureau.
Martin said the pullback from investors is largely responsible for the rapid decline in grain prices in recent weeks. He expects grain prices to recede further amid active talk of a global recession and lower oil prices.
Lower grain costs are welcome news for poultry processors, but recession fears bring forth a new set of challenges that they will face, said Paul Aho, an economist with Poultry Perspective.
He anticipates another quarter or two of red ink before chicken processors will see profits return.
Springdale-based Tyson Foods Inc. said the most recent decline in grain prices will have a delayed effect on operating margins because of the large inventory of corn already on hand.
While grain prices are down sharply, industry watchers said $4 corn today is still twice as high as it was just two years ago.
Tyson reported it would spend an additional $500 million in grain-related costs in fiscal 2008, which ended Sept. 30.
In the first three quarters, Tyson Foods lost $70 million in its chicken segment. It reported $349 million in added grain costs, partially offset by gains of $59 million from the company's hedging activities. In the previous year's period the company earned $229 million; grain costs were not made public.
Analysts predict Tyson Foods will report significant losses in its chicken segment for the quarter just ended. Tyson Foods is in its 30-day quiet period before earnings and chose not to comment on specific grain-related hedging or declining grain expenditures.
Industywide, chicken processors have lost about a nickel per pound this year, averaging losses of 8 cents per pound from June through September, according to Farha Aslam, industry analyst with Stephens Inc. This is in spite of a sharp reduction in grain costs in the same time period, which is typically the most profitable for processors.
Raw feed ingredients -- corn and soybean meal -- comprise about 67 percent of the total cost of raising a live chicken, this is up from about 52 percent a couple of year's ago, according to Richard Lobb, spokesman for the National Chicken Council.
He said lower grain prices in recent weeks are a welcome site for processors, but other dynamics are now hindering profits.
"There is still too much chicken in the marketplace and more painful production cuts need to occur before chicken breast prices will rebound," Aho said.
Breast prices averaged a dismal $1.18 per pound last week, 5.4 percent lower than a year ago, according to the U.S. Department of Agriculture.
Industry analysts predicted chicken breast prices would need to hit $1.90 per pound this past summer -- along with the production cuts already announced -- to reverse the trend and return the sector to the black in early 2009. Analysts predict another round of production cuts will happen by November in an effort to shore up prices by late next spring.
The industry faces seasonal lows through what Aho said will be a challenging winter and spring for processors.
He said leg quarter prices have remained strong thanks to robust exports to Russia and China, which have lessened the losses. Now facing a stronger dollar and global economic slowing, Aho said processors could see export demand retract -- more bad news for processors.
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