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Rough waters

by Alicia Karapetian
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To say it’s been a wild ride for the poultry industry in 2010 would be an understatement. From oversupply to volatility in the grain markets to trade conflicts, poultry processors were hit from every direction.

Industry officials are optimistic about 2011, but concerns about last year’s performance weighed heavily. In November, BMO Capital Markets analyst Ken Zaslow lambasted the industry for sustaining production levels he considered too high. He wrote, “While the industry may be inclined to blame corn [e.g., ethanol] and Russia, the reality is that the industry has no one to blame except itself. In fact, we remain confident that if the chicken industry showed any sense of restraint, chicken-industry margins would have only retreated to breakeven levels for a short time…as opposed to potential losses through February.”

Sanderson Farms’ President and COO Lampkin Butts acknowledged Zaslow’s concern, but added that blaming the industry as a whole doesn’t take into account one key factor. “Whether the industry is increasing or reducing supply, it’s not something the industry does as a group,” he said. “Each individual company makes decisions about their own production based on their bottom line and balance sheet.”

Increased pullet placements earlier last year led to the abundance of chicken, though much of that boost was a result of processors ramping up production first cut in 2008. “If you’ve got idle capacity, and you’re making profits, that’s what you do, crank the line back up,” Butts said.

The US Dept. of Agriculture estimates there will be a 1.5 percent increase in chicken supply this year, which National Chicken Council spokesman Dick Lobb calls “minimal” and in line with the longer-term trend for increased chicken consumption. “You have to remember that the cattle herd continues to shrink because of the high cost of feed and continuing dry conditions in the Great Plains have forced a lot of animals off the range,” he said. “A long-term contraction in the cattle herd means the price of meat is going up, so it gives [the marketplace] room for more chicken because people will trade down.”

Don Jackson, who was then CEO of Pilgrim’s Pride, made a similar optimistic assertion when announcing the company’s third-quarter results. “Chicken should be attractively positioned with consumers who are looking for the best value,” he said.

The turkey industry benefited from a tighter supply in 2010, which kept prices up. Supply was cut after the market was flooded with turkey in 2008 and 2009, which depressed prices. Later in 2009, however, Butterball CEO Keith Shoemaker says the decrease in turkey eggs sets kept the supply at a reasonable level for 2010. “Turkey-meat supply is currently tight with commodity prices increasing well above the previous year,” he adds.

But, the biggest wild card for poultry processors remains grain prices, which surged in September after USDA trimmed its crop estimates. Shoemaker says the increased price of corn since June has proportionally increased the cost of feeding the company’s turkeys. “As long as these increased feed cost conditions persist, our input costs increase and eventually consumers will be impacted with higher costs…” he said. “Corn pricing over the next eight months does not show any [sign of] relief.”

It’s a familiar lament among industry officials, and many hope the ethanol tax credit will be allowed to expire. But the issue’s outcome remained uncertain late last year, as a lame-duck, Democrat-controlled Congress amenable to keeping the tax credits may try to work some last-minute magic.

NCC’s Lobb theorizes ethanol proponents will attempt to attach a tax break renewal to a popular bill, such as a continuing resolution or renewal of the so-called Bush tax cuts, as it would be difficult for legislators to vote against those types of bills, even if they have unpopular amendments. “They’ll look for something that will have to be voted for,” he says.

Hedging hesitance
Due to the uncertainty in both crop levels and governmental involvement in pricing, companies are hesitant to hedge grain purchases. “I would not want to be in a long position in this market,” Tyson CEO Donnie Smith said in a late November conference call with analysts. “We’re going to keep a conservative, close-to-the-vest approach on our commodity trading.”

At Sanderson Farms, Butts says company officials are, “hand to mouth on our purchases. The whole planning season, everything was going well, up until that last crop report. We’re hand to mouth and surprised at grain prices.”

Nevertheless, both Sanderson Farms and Greeley, Colo.-based Pilgrim’s Pride have publicly acknowledged increasing the supply of chicken this January, with Sanderson opening a new tray-pack facility in Kinston, N.C., and Pilgrim’s resuming slaughter operations at its Douglas, Ga., plant.

“It will take a year to reach full production [at the Kinston facility],” says Butts. “So that’s less than 1 percent of total capacity weekly for the industry.” In addition, he added, Sanderson Farms has two new accounts in close proximity to the Kinston plant, and its location will allow the company to better service existing clients in the Northeast.

Even if demand increases to meet supply, trade challenges persist, which negatively impacted many processors’ operations in 2010. The short-term closure of the Russian market and the ongoing effect of Chinese anti-dumping tariffs have made their mark. The turkey industry didn’t experience the same disruption, however. “Fortunately, supply restraints seen in the overall turkey industry in 2010 have helped to lessen the impact the Russian ban has had,” Butts says.

What’s more, Mexico is the primary market for turkey meat and has increased its importance in the chicken market, according to USA Poultry and Egg Export Council President Jim Sumner. In 2009, Russia and China were the top two markets for US chicken, with Mexico following at third. In 2010, Mexico ranked first. “Without Mexico, we would not have made it through this year with keeping prices and markets up,” he said. In fact, in 2010, Sumner said volume was down only 10.8 percent and value down 7.3 percent despite having lost, “essentially 40 percent of our market.” The result, he says, “is nothing short of phenomenal.”

He appropriately credits USAPEEC’s efforts to broaden the reach of US chicken, with increasing deliveries to Mexico, Hong Kong, Iraq and Angola.

Russia’s closure from January through July, Sanderson Farms’ Butts estimates, depressed his company’s dark-meat prices by 10 cents per lb. and, overall, cost the Laurel, Miss.-based processor $1.2 million per week on 12 million lbs. of volume. On the up side, he acknowledges, “When they opened, we sold some 60-cent leg quarters, which is still not that high, but we made some of that up as the market reopened.”

For 2011, Russian officials have yet to finalize an import quota, though negotiations in previous years indicated this year’s number would be 450,000 metric tons. “Anything less would be a disappointment, but then again, we had a very big disappointment [last] year,” says Sumner. “We’ll be fortunate if we can ship above 250 this year.”

Continuing challenge
China, however, continues to be a challenge. Anti-dumping tariffs took effect in July and carry a heavy price tag. Butts says the charge costs Sanderson Farms $3 million a month operating income before taxes. “We’re still shipping product,” he says, “But because of the tariff, our net return is $3 million less. It’s still worth shipping that, but it’s still $3 million. Right now, it looks like a new reality.”

For the moment, Sumner agrees. “The Chinese situation is not progressing too well,” he says. “We are stuck with these tariff levels, and it appears that the only chance for changing this is for a WTO decision in our favor. The good news is that our government and specifically the US Trade Representative have strongly indicated their willingness to pursue our anti-dumping and countervailing duty issue to bring it to [the World Trade Organization] to appeal the decision.”

Sumner said he is hopeful, as WTO appeals are typically only pursued should the government strongly believe it would win the case. “We are optimistic that this will be resolved, but we are still very disappointed that this happened in the first place, that the Chinese government refused our offers to come to a compromise solution and that the US poultry industry is being unfairly punished for issues over which we have no control, issues brought about by the US Congress and by our current administration in Washington.”

Key issues important to the Chinese are tariffs imposed on that nation’s tires and wires, along with President Barack Obama’s position on the Chinese currency, Taiwan and even his meeting with the Dalai Lama. New leadership in the House of Representatives may help, however, as Rep. Rosa DeLauro (D-Conn.), will no long chair the agriculture appropriations subcommittee.

Economy in question
Among the myriad hurdles is the most important of all: money in consumers’ pockets. “The biggest question mark is the economy. If unemployment would improve and the economy to improve and exports would be normal, then the supply of chicken could be absorbed,” says Butts, who acknowledges the unlikeliness of the scenario. Yet he too, is optimistic. “My guess is that the first half of the year will be difficult, and the second half will be better than that.”

Alicia Karapetian is a contributing editor from the Chicago area.
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