Poultry producers face excess supplies as feed costs soar

U.S. chicken supplies are ballooning even as feed costs rise, threatening profits of large poultry producers that continue to expand their flocks.

Eggs in incubation and the size of breeding flocks–the leading indicators of chicken supplies–are climbing, and major producers such as Pilgrim’s Pride Corp. and Sanderson Farms Inc. are in midst of expansion projects. Producers have been chasing expanding margins and growing export markets, but analysts say cutbacks will be needed to keep prices from dropping sharply.

The U.S. Department of Agriculture recently reported U.S. production of chickens used for meat in September reached its highest level in nearly two years. Annual exports are on track to be the lowest since 2007, curbed by trade restrictions from Russia, which have since been lifted, and China.

“For some time, we expect processor margins to be very negative until supplies are cut,” BB+T Capital Markets analyst Heather Jones wrote in a recent report.

Investors will look to earnings reports to see how producers plan to react. Last week, Foster Farms, the largest poultry producer in the western U.S. by revenue, announced it was delaying expansion of a plant due to high corn costs. Pilgrim’s Pride and other producers declined to comment.

Dick Lobb, spokesman for the National Chicken Council, said he was unaware of any additional planned reductions in the industry. Continued improvement in the economy would boost restaurant demand, while higher prices expected for pork and beef should spur consumers to buy chicken instead.

The supply increases come despite sharp price gains in corn, a key cost in chicken production because it is used for feed. Corn futures at the Chicago Board of Trade are up about 75% since June 30 due to worries about global grain supplies following a Russian drought and disappointing U.S. crop.

Grain prices are likely to remain strong well into 2011 as supplies remain tight and demand hasn’t yet pulled back. Similar dynamics walloped the industry in 2008, causing huge losses for Tyson Foods Inc. and forcing Pilgrim’s Pride into bankruptcy.

According to BB+T analyst Jones, eggs set in incubators posted year-on-year gains of 4% to 8% in recent weeks. Producers will face significant pressure on prices from mid-November into December as the increased supply comes into the market, she added.

Source: CME Group