As in any other year, the poultry industry made its share of headlines in 2008. But just like nearly every other U.S. industry, it was dominated by economic news in 2008 as the nation and the world continues to endure a sobering financial crisis. For many business leaders, it is a financial crisis of unprecedented proportion. And it was a crisis that grew worse – seemingly by the day – as 2008 ended its run.
The poultry industry received a double whammy of sorts in 2008. First, it was impacted by the general economic demise spreading throughout the world. Second, the poultry industry’s financial state was whacked by high feed prices.
The poultry industry saw what was coming in late January 2008 when Springdale, Ark.-based Tyson Foods reported that the cost of feeding the chickens, cattle and hogs that form the foundation of its business was taking a toll on the company. Tyson executives had projected an additional $300 million in grain costs for fiscal 2008, but revised that figure in late January and said it would exceed $500 million.
"The continued escalation of grain prices, driven largely by government mandates for corn-based ethanol, has caused a domino effect for other inputs," said Richard Bond, Tyson’s president and CEO. "Cooking oil, flour and other feed ingredients are all on the rise. For the foreseeable future, consumers will pay more for food, especially protein, because grain represents a proportionally higher percentage of input costs compared to other foods."
At the time, Bond talked about the volatility of the commodity markets and said Tyson had decided to temporarily withdraw its previously issued earnings guidance. "In this erratic and unpredictable operating environment, it is virtually impossible to make meaningful earnings forecast assumptions," Bond said.
In February, Agri Stats, a management reporting and benchmarking firm based in Fort Wayne, Ind., reported that while trends indicated continuing growth in demand worldwide for poultry products, the industry faced strong challenges domestically related to the cost of feed, as well as environmental issues and consumer demands.
"We [chicken processors] are an industry that is in demand," said Mike Donohue, vice president of Agri Stats. "We have a product that people want and continue to consume."
However, Donohue said the rising cost of feed, which has always been a significant factor in the profitability of the poultry industry, had become an enormous challenge. "This is a new paradigm we’re looking at because of the nation’s energy policy," he added.
The renewable fuels mandate within the federal government’s energy policy will have an impact on the poultry industry for years to come, Donohue predicted in February. By the year 2015, about 36 percent of the nation’s corn production could be earmarked for ethanol production. In March, Tyson’s Bond criticized the government for rising corn prices.
"I can rant and rave about this for some time, but some of the things that our government in Washington has done in terms of mandating the use of corn-based ethanol…it’s not right," Bond told the Shelbyville Times-Gazette.
With corn prices reaching a record $5.40 per bushel at the time, the full impact of the spike hadn’t yet hit the consumer, Bond said.
In April, officials with the National Restaurant Association said the economic downturn instigated by the mortgage crisis and higher food prices had hit one of the poultry industry’s most crucial markets: foodservice. According to the NRA’s index of restaurant activity, the performance index for restaurants was down for the fourth month in a row in February…the first time that had ever happened.
Also in April, Pittsburg, Texas-based Pilgrim’s Pride Corp. announced it would cut its weekly poultry production by 5 percent in the second half of 2008 because of the "current negative industry fundamentals." The announcement would begin a string of bad economic news for one of the nation’s largest poultry processors.
Coming on the heels of the previous month’s news that it would shutter its Siler City, N.C., facility, Pilgrim’s Pride said it hoped the production cutback would even out supply and demand during a period when ethanol production had driven feed costs to record-high levels.
"Soaring feed-ingredient costs fueled by the federal government’s misguided ethanol policy has created a crisis in our industry, the true effects of which are only just now beginning to be felt by American consumers in the form of higher food prices," said Clint Rivers, Pilgrim’s Pride’s former president and CEO, who said processors of all sizes were also cutting production.
In the midst of all the bad economic news, Laurel, Miss.-based Sanderson Farms reported some upbeat news in late April, announcing it would build a new $126.5 million poultry processing complex in Kinston, N.C.
"We believe this expansion will enhance our ability to drive revenues and earnings, and allow us to continue our record of building long-term value for our shareholders," said Joe Sanderson Jr., the company’s chairman and CEO.
But the good news was short-lived.
In late June, Sanderson Farms announced it had delayed the construction of the complex. "In light of escalating prices for corn and soybean meal, our primary feed ingredients, it has become increasingly difficult to predict our future input costs," Sanderson explained. "Because a third of the U.S. corn crop is now expected to be used to produce ethanol, the poultry industry and other animal feeders are being challenged by increasingly tighter supplies of grain and historically high prices."
For the first half of fiscal 2008 ended April 30, net income for Sanderson Farms was $12.4 million, compared with $24 million the previous year. Sales were $796.4 million, up from $653.2 million.
In July, Pilgrim’s Pride reported it experienced a 41 percent increase in the cost of feed ingredients when compared to the same period during the previous year. The cost spike led it to record a loss of $52.8 million for the third quarter of fiscal 2008, ended June 28.
"Our financial results in the third quarter of fiscal 2008 reflect the significant headwinds facing our company and industry from high feed costs," Rivers said. "We have worked diligently to pass along price increases to our customers to help offset the impact of record-high corn and soybean meal costs. But like other producers, we simply have not been able to keep pace with the extreme price volatility in the grain markets."
In August, Atlanta-based poultry processor Cagle’s said it also recorded a substantial loss – $2.9 million for its 2009 fiscal first quarter ended June 28. The company noted its feed-ingredient costs increased 43 percent compared with the first quarter of fiscal 2008.
Also in August, economists and leaders from the meat and poultry industry voiced displeasure and disappointment following the Environmental Protection Agency’s decision to refuse a request by Texas Governor Rick Perry for relief from the Renewable Fuel Standard, which they blamed for contributing to record food-price inflation.
"We are deeply disappointed that EPA has failed to recognize the very clear signs that the food-to-fuel policy is causing severe harm to the economy," said George Watts, president of the National Chicken Council. "When food prices are rising and chicken companies are losing money because of high feed costs, it is outrageous that the federal government continues to require and even to subsidize the diversion of corn from the food supply into the fuel supply."
In late August, Sanderson Farms reported another bad quarter – a loss of $3.4 million for the fiscal third quarter, which compared with net income of $30.6 million for the same period the previous year. Sanderson said what many poultry processor CEOs had said previously. "Our results for the third quarter of fiscal 2008 reflect difficult market conditions for our industry. While retail and export demand for chicken remained relatively strong during the quarter, casual dining and foodservice customers have been affected by a significant decline in restaurant traffic due to weak economic conditions and higher fuel prices."
Also in August, Moody’s Investors Service placed the long-term ratings of Tyson Foods under review for possible downgrade.
"The long-term trend of generally rising corn prices is expected to continue," Moody’s said. "[Tyson’s] chicken segment has been especially hard hit by higher input costs, with grain costs expected to be up $550 million in the current fiscal year. Tyson’s chicken business incurred a reported operating loss of $52 million in the nine months ended June 28, 2008, proforma for charges, down from a profit of $229 million in the same period in the prior year."
In September, Pilgrim’s Pride announced another 100 positions would be cut at its El Dorado chicken processing facility effective Nov. 21. This round of cuts was in addition to 600 layoffs announced in July.
In early October, nearly 500 jobs were lost in the town of Buffalo, Mo., when the Petit Jean Poultry plant closed after losing it biggest customer, Tyson.
Also in October, Rich Nelson, director of research for Allendale Inc., a commodity research advisory firm headquartered in McHenry, Ill., said THAT Pilgrim’s Pride had a better than 50-percent chance of surviving its current financial situation and gave the company a 60-percent chance of avoiding bankruptcy. "I do feel that they will get by this, but there’s also reason to doubt it," he said.
Pilgrim’s Pride notified its lenders that it expected to post "a significant loss" for the quarter ended Sept. 27 because of high feed-ingredient costs, continued weak pricing and demand for breast meat, and the significant negative impact of hedged grain positions during the quarter."
At the time, Nelson said Pilgrim’s Pride had too much debt, among other problems. "They borrow and borrow and borrow," Nelson said. "They borrowed heavily to make the Gold Kist acquisition, and they’ve continued to borrow. In the current economic environment, carrying that much debt on the balance sheets doesn’t make the bankers happy."
In November, Cagle’s announced a net loss of $5.5 million for the second quarter of fiscal year 2009 compared to a profit of $1.4 million for the second quarter of fiscal 2008. But the company said it expected a return to profitability in early 2009.
A few days later, Tyson reported a net income of $86 million for the year ended Sept. 27, which was down 68 percent from $268 million compared to the previous year.
"Although it was a difficult year, we continued to manage the company for the long term and took important steps in our strategy to become a truly multinational enterprise," Bond said.
Tyson’s chicken segment had an operating loss of $118 million during the year as the result of increased grain, plant and feed ingredient costs. Sales in the segment were $8.9 billion.
Pilgrim’s Pride’s plummet
But Tyson’s news wasn’t as bad as Pilgrim’s Pride, which in early December announced it had filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Texas.
"After careful consideration of all available alternatives, the company’s board of directors determined a Chapter 11 filing was a necessary and prudent step and the best way to obtain the financing necessary to maintain regular operations and allow for successful restructuring," Rivers said. "We expect to emerge from this restructuring a stronger, more competitive company that is well positioned for growth and enhanced profitability."
According to a Nov. 28 filing with the Securities and Exchange Commission, Pilgrim’s Pride said it expected to post a loss of $802 million for the fourth quarter ended Sept. 27. This takes into account a charge of $501.4 million related to the acquisition of Gold Kist. For the full-year ended Sept. 27, the company anticipated a loss of $998.6 million.
The company said operations are expected to continue as normal during the bankruptcy process.
Also in December, Sanderson Farms announced a loss of $43.1 million for the year ended Oct. 31. This compared with income of $78.8 million during the previous year. Sales were up 17 percent for the year.
Looking back on the year, Richard Lobb, director of communications at the National Chicken Council, Washington, D.C., says while corn prices are now lower, prices are still too high. "There was a tremendous amount of damage done to the industry," Lobb says. "The skyrocketing cost of feed imposed about $7 billion in added cost to our industry."
Lobb points out the government’s ethanol mandate would grow from 9 billion gallons in 2008 to 10.5 billion gallons in 2009. He doesn’t expect any reform in the ethanol industry, especially since President Barack Obama hails from Illinois, a corn-growing state.