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Bird Business

August 1, 2011

Times are tough for the chicken business the Wall Street Journal reports. Pilgrim’s Pride will shut down another of the company’s chicken-processing plants in an effort to survive a vicious price squeeze in the poultry business. “Our industry’s business model is not sustainable at these [price] levels,” said Pilgrim’s Pride Chief Executive Bill Lovette on a conference call. The company will have 29 bird-processing plants after the Dallas plant closes. However, eight of the 29 facilities have already been idled.

Pork and beef producers are weathering the high grain price storm because of strong export markets. But chicken demand is more dependent on U.S. consumers, 20% or so that are unemployed or under employed. Ian Berry and Marshall Eckblad write,

The fact that chicken prices have continued to struggle is due to stubbornly high supplies and is a sign that the domestic market is saturated, said Russ Whitman, vice president for Urner Barry, which tracks the commodities sector. Boneless, skinless breast-meat prices are down 17% over the past year.

So while corn prices have doubled in the past few month, Pilgram’s hasn’t been able to pass on the input cost increase. “The ultimate source of the determination of prices is the value judgements of the consumers,” Ludwig von Mises wrote in Human Action.

Serving to pump up corn prices is a mandate from Congress to subsidize the production of corn-based ethanol. Now a third of the country’s corn crop goes to make fuel, up from 7% in 2001. “The dangerous fact is while government is hampered in endeavors to make a commodity cheaper by intervention,” wrote Mises in Omnipotent Government, “it certainly has the power to make it more expensive.”

Companies like Pilgrim’s Pride attempt to lessen input cost risk by speculating in futures markets. However, in Pilgrim’s case these bets didn’t work out.

Pilgrim’s also indicated it made wrong-way bets on the price of corn, reporting $5.7 million in net mark-to-market losses in its derivatives portfolio as corn prices dropped sharply in late June after hitting a record high of nearly $8 a bushel early in that month.

The corn price has backed off to $6.68 a bushel as I write. Though not close to its record high, corn has more than tripled since 2005 when it fetched less than $2 a bushel. During the same time the price of whole chickens has increased just north of 11% according to the Bureau of Labor Statistics.

Pilgram’s Pride filed for bankruptcy in 2008 and continues to struggle as does chicken processor Townsend, which announced last week was closing all of its operations by November. Nearly 1,000 workers will be sacked from two plants in North Carolina and contracts with 200 chicken farms will be terminated. Ukrainian billionaire Oleg Bakhmatyuk, “just decided to shut it down and take his losses and go on,” said David Purtle, a former Tyson Foods executive who was hired to be Omtron’s CEO. “He just didn’t like the environment in this country and the lack of discipline that the poultry industry had.”

The assets of Allen Family Foods, a 100-year-old Delaware commercial broiler chicken producer, are being purchased by Korea’s largest poultry producer. Allen filed for bankruptcy earlier this year citing rising feed prices, operational mistakes, and a cut in its credit line. Charles “Chick” Allen, whose grandfather founded the company 92 years ago, told The (Wilmington) News Journal, “Keeping the operations open, people employed and growers’ houses full of chickens have been ongoing major concerns to the family throughout this difficult process.”
“When it starts getting above $5 a bushel with corn [chicken processors] really can’t make money,” said Dan Campeau, a poultry agent with the N.C. Cooperative Extension Service. “They’re just treading water.” Campeau goes on to say, “If we have another year or two like this it’s going to drive everybody out of business and most of our business is probably going to go south to Mexico or South America.”
And as if the bird business wasn’t tough enough, U.S. poultry plants have repeatedly been raided by Immigration and Customs Enforcement (ICE) agents during recent years.

All this bad news must mean the days of cheap chicken will be over soon.

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