US broiler industry ­endures a dismal year

At the present time most US broiler producers are generating losses from their production, processing and marketing operations. The situation is compounded by a less than optimistic outlook for recovery in consumer purchasing power in addition to no prospects for relief through lower feed costs.

Key statistics on production for 2010, estimates for 2011 and projections for 2012 are shown in Table 1. For the first time in many years, USDA data indicate a decline in output. This is currently reflected in a 6% reduction in chick placements during the mid-September to mid-October 2011 period compared to the corresponding five weeks in 2010.

Exports represent the only redeeming factor for the industry although increases in volume from 2011 to 2012 are at best moderate. The values in Table 1 indicate increased exports as a proportion of production, due mainly to the relative decline in domestic output. The impact of feed escalation is shown in Table 2 which expresses feed cost and market price as an index, with 1999 as the base expressed as 100. Between October 2010 and the corresponding month in 2011 feed cost increased by 39%. Concurrently market realisation based on the USDA estimate declined by 18%. Deterioration on both sides of the cost: sales equation have seriously impacted profitability. The major figures on US broiler production and the influential factors on the industry are shown in Table 3, Table 4, Tables 5-6 and Tables 7-8.

Multinational ownership
With the decline in profitability among US producers and a disinclination of banks to advance funding, opportunities have developed for foreign producers to enter the industry. Apparent advantages represented by low feed cost, extreme efficiency, political stability, high technology and a well developed infrastructure have proven attractive in the past to producers in countries which have inherent structural deficiencies or high costs.

During the past two years there have been a number of significant acquisitions which are changing the composition and culture of the US broiler industry. Currently it is estimated that 25% of total output is either owned or directly managed by non-US companies.

In October 2009 JBS of Brazil acquired Pilgrim’s Pride, the second largest US broiler producer after the family-controlled company filed for Chapter 11 bankruptcy due to injudicious hedging of ingredients. Their demise was also attributed to declining sales volume due to an inappropriate market mix and pricing policy.

In July 2010, Marfrig of Brazil acquired Keystone Foods with an output of four million broilers per week. This company produced for the food service segment of the market including the major multinational quick-service restaurants.

In December 2010, Townsend’s with a production of approximately two million broilers per week filed for Chapter 11 bankruptcy. Subsequently the company was divided among two buyers with Arkansas operations acquired by US producer Peco Foods. The North Carolina operations were purchased by Omtron of the Ukraine. After a period of consolidation and investment, the latter company elected to mothball the North Carolina operation pending an improvement in the US broiler market.

On June 9th 2011, Allen’s Family Foods, producing approximately 2.2 million broilers a week filed for Chapter 11 bankruptcy and was eventually acquired by Halim of Korea on July 28th. It is considered significant that this company had accumulated debts of €60 million and was acquired for €35 million plus inventory.

On October 28th 2011, Bachoco of Mexico acquired OK Foods which produces three million broilers per week. An adverse €11 million judgment against the company by disaffected contractors contributed materially to the perilous financial state of the company and hastened the purchase.

Reverse of white-to-dark
It remains to be seen whether investment by foreign owners will generate positive returns in the short or intermediate term, given the fact that many of the inherent advantages enjoyed by the US industry are no longer attainable. Feed costs are high and will remain so in the immediate future. The regulatory environment is no longer supportive of intensive animal agriculture and the domestic market remains depressed for all but niche producers. The US dollar is gaining strength against many foreign currencies.

Of obvious concern to foreign investors is the reverse of the white-to-dark meat premium. In years gone by broiler producers in developing nations negotiated for permission to export white meat to the US in exchange for receiving dark meat, feet, wing tips and gizzards. This situation seems to be reversed and the attraction of a key segment of the US market appears to have evaporated. The historical differentiation in price between light and dark meat was responsible for investment by US companies in selected nations.

Both Tyson Foods and Pilgrim’s Pride operate subsidiaries in Mexico. Tyson Foods has joint ventures in Asia. Importation of products into the US has been effectively blocked by restrictions relating to disease and processing regulations despite moves to recognise equivalence in safety and quality and prevailing trade agreements including NAFTA, WTO and bilateral FTAs.

US broiler exports
Export of broiler parts predominately in the form of leg quarters has supported the US industry by removing from 15% to 18% of processed broiler mass from the domestic market, thereby contributing to the support of prices for white meat. This reality has been variously received as beneficial, satisfying demand in some nations or interpreted as “dumping” by the broiler industries in countries forced to compete with imported dark meat from the US.

Broiler exports for the periods January through August 2010 and 2011 respectively are shown in Table 9. It is noted that for the first eight months of 2011 for which data is available, broiler parts represented 92% of volume and 88% of total value. In comparing the two eight-month periods, unit value has increased by 14% to €816 per metric ton for leg quarters. This value compares unfavourably with the unit value for whole frozen carcasses exported by Brazil which average €1,300 per metric ton. The US broiler industry has regarded exports as a “by-product” and has neglected to develop product differentiation and added-value, instead relying on a strategy of moving unwanted commodity dark meat from numerous plants to importing nations. The concept of dedicated export complexes with government subsidies and concessions, and catering to specific markets as in Brazil, has never emerged in the US. Initially Russia was the favoured export market for US integrators following the donation of “bush legs” to the newly emerged Russian Federation.

Diversify the range
Over the years Russia has become increasingly self-sufficient in broiler production and has employed a variety of inconsistent bans and unofficial barriers based on alleged disease and quality attributes to support the development of their domestic industry. Currently the largest markets for US broiler parts are Hong Kong, Mexico and Russia as the major importers. All of these markets are subjected to overt and indirect restrictions despite trade agreements. The US broiler industry cannot take for granted that markets will absorb over 15% of production especially at prices which contribute to profitability, given current and predicted feed, labour and energy costs.

Despite a constant barrage of obstructions, the USA Poultry and Egg Export Council, sponsored in part by the USDA and the industry has managed to promote the export of broiler products and has maintained export volumes. Their major achievement has been to diversify the range of importers to compensate for the inconsistencies and unjust embargos imposed by importers. The top three importers collectively represented 29% of volume exported during the first nine months of 2011.

 

It is noted that the US industry is virtually reliant on contract production with inter-flock intervals of 12 to 16 days. Experience has shown that when “down-time” is reduced to below 10 days under conditions of high market demand, production parameters deteriorate. Elevated mortality and condemnation rates occur with rapid re-stocking, especially during winter and on the eastern Delmarva shore.

The weight range of US broilers extends from approximately 1.75 kg for birds dedicated to nine-piece portions for quick service restaurants to above 3.50 kg for roasters and cut-up. Table 11 shows the current weight range of the US broiler industry with approximately 20% of production in the roaster category for specialised portioning and whole-bird markets. Over the intermediate to long term the proportion of high weight flocks may well decline due to protracted high feed costs, lower demand for expensive breast fillets and the inherent inferiority of high-yield parents with respect to chick cost.

US broiler production costs effective August 2011 as depicted in Table 12 are derived from industry contacts and published data and reflect a weighted average live weight of 2.79 kg. It is noted that feed represents 72% of production cost and is therefore the most important variable in profitability. Feed costs for the various broiler diets are shown in Table 13 indicating both ingredient costs and delivered cost to farms. Manufacturing including pelleting and for delivery collectively represent approximately €11 per metric ton divided almost evenly between the two components.

Rational decisions
Low profitability or losses will persist in the US broiler industry for the intermediate future. Previous cycles of low revenue attributed to over-production were essentially self-correcting, based on the dage that “low prices are effectively the cure for low prices”. Short term cutbacks in production generally restored market equilibrium and profitability. As the industry became more concentrated, individual integrators made rational decisions on expansion and product mix based on available data and market projections. The current situation which involves both an unprecedented increase in the cost of feed together with depressed demand represents unchartered territory.

Until there is a radical reversal of the inappropriate and inflationary program of diverting maize to ethanol, feed prices will remain at unacceptably high levels. A slow recovery in the economy will delay restoration in market demand and hence low prices until the end of 2012. High feed costs extend beyond the US. Lower profitability is now evident among exporting nations such as Brazil and Thailand in addition to regions where domestic production contributes to self-sufficiency. For this reason the US export market will remain competitive, despite the current alignment of international currencies relative to the US dollar. The prospects for exports appear favourable providing that there are no major or prolonged interruptions in trade due to political instability or outbreaks of catastrophic disease.

Need to innovate
In the coming months there will be a continued reduction in chick placements, with additional companies either filing for bankruptcy protection or undergoing acquisition or consolidation. Broiler producers committed to undifferentiated product will be forced to innovate, diversify product range and emphasise branding with commensurate product attributes and promotion to maintain unit revenue.

There is hope that initiative, flexibility and the application of sound business practices will contribute to the long-term survival of broiler production in the US. It is obvious that the industry will be different by 2015 with respect to the structure, ownership and operation prevailing in 2011.