October 12, 2010

US poultry companies face uphill battle amid rising CBOT corn

US chicken producers struggling to rebuild their profit margins could face a steep uphill battle if CBOT corn prices keep climbing.

 

The distaste for chicken can be pinned on a 43% spike in corn futures since July. Corn prices are now trading at a two-year high on CBOT. On Monday (Oct 11), corn for December delivery, the most active contract, rose to US$5.73 a bushel.

 

Still, rising corn prices aren't expected to affect chicken companies just yet. Upcoming quarterly financial reports from Sanderson, Pilgrim's and Tyson will reflect chickens raised on cheaper corn.

 

Over the past three months, Sanderson Farm shares were down 25%, Pilgrim's Pride shares were down 20%, and Tyson Foods shares went down 15%. By comparison, the S&P 500 Index is up 8%.

 

It is the year 2011 that could weigh heavily on profit margins, depending on future corn costs. This is making investors wary since corn and soy constitute more than half the cost of raising a chicken. Shares prices could remain feeble if equities analysts cut 2011 profit targets.

 

On average, analysts are forecasting Sanderson to earn US$5.07 a share in 2011 and for Pilgrim's Pride to earn US$0.67.

 

Sanderson buys its feed grains on the open market, opting not to hedge against spikes or declines for corn or soy in the futures markets. While the chickens the company sold in August and September were raised on US$3.45-a-bushel corn, future feed costs will be much more.

 

For its part, Pilgrim's Pride is far more conservative in its hedging positions since being burned by soaring feed grain prices in mid-2008. The company emerged from Chapter 11 bankruptcy almost a year ago.

 

"At this time we are buying close to the market on corn and soy meal," company controller Gary Tucker said on July 30. Pilgrim purchases four million bushels of corn a week. On average, it paid US$3.55 for a bushel for that corn in the April through June period.

 

Despite the run-up in prices, corn hasn't gotten to unmanageable levels yet, said Stephen Share, food processing analyst at Morgan Joseph.

 

Sanderson, the No. 4 US chicken producer said on August 23 that it had priced 27% of its corn needs and 73% of its soy supply through October.

 

Pilgrim's Pride would not feel the full impact of rising corn prices, Share said. Its third-quarter report card should reflect the cost to feed chickens when it had the chance to lock in corn for under US$4 a bushel.