Chicken industry faces consolidation after "disastrous" expansion

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The U.S. chicken industry requires significant changes following a “disastrous” expansion phase, meaning larger, stronger producers likely will buy smaller, weaker counterparts amid growing losses from high feed costs and a weak economy, Rabobank Group analysts said.

While chicken companies have curbed production in recent months, the industry needs to “consider plant closures more intently,” Rabobank analysts David Nelson and Adriaan Weststrate said in a Dec. 12 report. “Without plant closures, excess capacity will likely continue and U.S. ownership of the industry could become undermined.”

Chicken producers are in the midst of their second major downturn over the past three years, and ongoing losses likely will be deeper and last longer than any previous industry slump, the analysts said. Recent problems stem from decisions to expand production in a “mature” market during a slow economy, they said.

The results, Nelson and Weststrate said, “have been disastrous.” Netherlands-based Rabobank is a large U.S. agricultural lender.

Poultry companies, like others in the livestock business, were increasingly squeezed as corn prices soared to all-time highs near $8 a bushel earlier this year. Corn prices have dropped sharply in recent months but are expected to remain historically high through much of 2012, keeping costs for a primary feed ingredient elevated.

Unlike beef and pork industries where producers bear the burden of excess supply and scale back in response, chicken farmers are insulated from negative economic implications of oversupply by grower contracts, and recent court rulings make it difficult for large processors to trim capacity, Rabobank said in the report, titled “This is Not Your Grandfather’s Chicken Industry.”

Among top poultry companies, Pilgrim’s Pride Corp., the No. 2 U.S. processor, reported a $162.5 million loss in its previous quarter on slumping chicken prices and rising corn costs. Tyson Foods, Inc., the top processor, posted an operating loss of $82 million in chicken in the company’s previous quarter.

Reduced chicken production may benefit beef and pork industries by curbing supplies of a cheaper meat in the competition for consumers’ food budgets. Retail beef and pork prices rose sharply this year, outpacing chicken, amid robust exports and shrinking cattle herds.

Currently, many retailers are absorbing higher beef and pork costs rather than raising prices at the supermarket meat case while compensating for some of the shortfall by expanding their margins on chicken, Rabobank said.

Retailer margins reverting to previous levels as they lower chicken prices could help poultry processors, Rabobank said. “However, (retailers) cannot be seen as the catch-all solution” for the poultry industry, they wrote.

“Both foodservice and retail customers are struggling,” Rabobank said. “The industry needs to exhibit more discipline on both the production side and in holding out on pricing for its product. This is easier said than done, but there is no alternative. The current situation is unsustainable.”

Ultimately, the chicken industry “is likely to evolve so that it comes into stronger and fewer hands,” the Rabobank analysts said, without specifying which companies may emerge as the industry consolidates.

“Larger, publicly-owned companies will have to demonstrate more discipline that is currently the case among many smaller, privately-owned companies,” they wrote. “This can occur if the market drives out players, as is happening today, or if companies take action on their own through mergers and acquisitions.”

It’s “better to choose your own fate early than to wait until all your grandfather’s equity is gone,” they added.



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