The red meat sector's misfortunes are proving very fortunate for America's broiler industry. Near record high hog and cattle prices and a PEDv-induced pork shortage are making many consumers substitute poultry in place of red meat. As a result, per capita chicken consumption is rising from 36.9kg in 2013 to 37.kg this year and a USDA estimated 37.8kg in 2015.

 

This boosted demand and selling prices for domestically popular cuts such as breasts just as feed costs fell by a third over the last year. Overseas, rising chicken export prices and bird flu outbreaks in China and neighbouring, NAFTA-linked Mexico is boosting foreign demand for bonier, dark chicken parts that are unpopular in America's domestic market.

 

Hence, after a terrible performance in 2011 and 2012, these factors made 2013 the US broiler sector's most profitable year in over a decade. With feed costs falling further and prices staying strong, even better earnings are expected this year.

 

Indeed, returns were expected to fall back to normal levels when red meat prices slumped in the fourth quarter of last year. Fortunately, the PEDv epidemic's devastation of hog inventories and exceptionally cold winter created a new spike in red meat prices. According to Rabobank Food and Agribusiness Advisory, this caused average domestic chicken prices to rise 19% during the first quarter. That effectively boosted prices approximately 10% above their five year average. Though not quite at 2013's levels, average feed costs are now lower and continuing to fall, making for wider gross margins than last year.

 

But while gross margins are healthy, actual output is relatively flat. After over expanding inventories and production too aggressively in 2010, the industry went through several bad years of insufficient demand and high feed costs. This induced producers to trim their broiler breeding stock.

 

Supplies were further constrained from their initially forecasted 2.5% to 2.9% expansion by winter time propane shortages. This resulted in some chicken housings being inadequately heated over the winter months and further impacted poultry productivity and fertility.

 

In fact, from January to June, the five week moving average of weekly broiler chick placements stayed within 1% of 2013's level for 20 consecutive weeks. As a result, after increasing 2.1% in 2013, chicken meat production will rise only 1.8% this year, with most of the increase accounted for by higher bird weights, which are expected to increase 1.5%.

 

Among major domestic lines, only whole chickens made a partial inventory recovery. Whole hens in cold storage started 2014 30% below the previous year's level. However, by the second quarter, they were only 4% below May 2013's level. This however, was partly counterbalanced by a strong fall in whole frozen rooster numbers: They started the year 22% below January 2013 levels but by April, their inventories were 28% below that of the same month in the previous year.

 

With demand picking up faster than production, inventories fell as surely as prices increased. The USDA expects closing chicken meat inventories to fall 6.6%, from 303 thousand tonnes at the start of this year to 281,000 tonnes at the end of 2014.

 

But it is possible that inventories may trend below this projection. At the start of May, total broiler meat in cold storage was 250,000 tonnes, 15% below last year's level at that time. Only leg meat inventories increased, with the exception of leg quarters. The latter's supply fell when neighbouring Mexico's avian flu epidemic induced additional exports of this cut to that country. As a result of Mexican demand, leg quarter stocks went from being 24% above the level of a year earlier in February to 27% below the previous year's level by early May.

 

Mexico's misfortune's notwithstanding, whole birds and white breast meat led the inventory decline,

Along with the decline in leg quarter stocks, stocks of whole birds, breast meat, and wings also declined.  Stocks of whole birds and breast meat fell steadily throughout the first six months of this year. Mirroring the situation with leg quarters, legs opened January at nominally higher levels than a year ago but entered May some 27% below their level during the same period of 2013.

 

As a result of these drawdowns, the USDA projects that chicken meat inventories ended the first half of 2014 at 256,000 tonnes, a steep 13% below mid 2013's level. It is this combination of falling chicken meat inventories, rising demand and flat broiler numbers that has helped pull prices to the same levels seen during last summer's rally.

 

The only dim spot in this otherwise bright forecast was exports. Amid high domestic demand and flat production, the quantity available for export fell. The USDA was forced to revise its 2014 export forecast from 3.40 million tonnes to 3.29 million tonnes, an immaterial 0.8% less than in 2013. Along with Mexico, only China, where bird flu coincided with a WTO ruling in favour of US chicken paw exports, stands out at this time.

 

This is somewhat of a change. Once the most export-oriented US meat line, the 19.3% proportion of broiler meat exported by America is now lower than the 21% of pork shipped overseas. On one hand, that represents lost overseas market share. On the other hand, with second tier producers like Thailand and Turkey taking market share from Brazil, US poultry's international competitiveness is not impacted by the current export slowdown.

 

Having seen giants like Pilgrim's Pride go bankrupt from ambitious overexpansion in the late 2000s, US broiler producers are happy to take a conservative stance, enhancing their profits through risk-free wider profit margins rather than by increasing output. Look for them to do the latter only if the prices of feed and red meat go in opposite, but favorable directions for another year.