May 14, 2009

US chicken companies may be much more conservative in their grain buying this year, as they fear a repeat of last year's situation.

 

In 2008, corn rose to a record high of US$7.65 per bushel, causing chicken companies to lock-in grain purchases near that price amid worries that prices could further increase.

 

But grain prices soon tumbled and left those companies burdened with expensive feed which bled their coffers dry. Pilgrim's Pride, the largest US chicken company at the time, had to file for bankruptcy protection.

 

It remains to be seen if near-US$8 corn will return this year, but if it does, chicken companies may buy only what they need for short-term use, said Bill Roenigk, economist with the National Chicken Council.

 

If corn goes to US$8 again, the price won't stay there because it's unaffordable in the current economy situation, Roenigk said.

 

At the CBOT, where grain prices are set daily, spot corn is at about US$4.20 per bushel, much higher than the historical trend of around US$2 but down sharply from the highs in 2008.

 

Tyson Foods, now the top US chicken producer, said it will be much more careful in its grain buying.

 

Because Tyson now has more short-term contracts with customers, the company does not need to make as many large positions as it has in the past, Donnie Smith, Tyson's senior group vice president for chicken and prepared foods, said of feed purchases.

 

Prices for corn and soymeal may remain volatile as global demand continues to increase.

 

USDA on Tuesday (May 12) estimated a 12.09-billion-bushel US corn crop this year, versus 12.10 billion a year ago and 13.038 billion two years ago. That indicates corn prices will not go much lower from current levels, and could even go higher as the demand is there, said Diane Klemme, vice president at Grain Service Corp.

 

She added that the crop scare could further boost prices.

 

Contributing to the chicken industry's problems last year was the inability to raise chicken prices fast enough to offset higher feed and fuel costs. Since then, companies have shortened year-long sales contracts, particularly to food service customers, to about three months, allowing for quicker price adjustments.