Increased feed costs throw US meat production into the red

 

 

Soaring feed costs have erased profit prospects for US pork and poultry producers next year, curbing expansion plans and likely forcing a cutback in chicken production, analysts said.

 

As corn rallied above US$5 a bushel, estimated 2011 hog production margins slipped to a loss of US$4 per slaughter animal from a per-head profit of US$4 three weeks ago, the analyst said. Current margins were also in the red.

 

Chicken producers are also expected to lose money next year, which probably will stall the industry's recent expansion, the analyst said.

 

"The very meaningful increase in feed costs that has been unmatched by improvement in customer demand will result in sustained losses for poultry producers," she said. "Thus, we expect a meaningful reduction in supply, beginning in early 2011.''

 

In the pork business, producers will probably halt their nascent expansion and potentially return to contraction mode, the analyst said. Pork demand "remains stout, but we believe supply contraction may be required to return profitability to solid levels," she said.

 

A decline in chicken production may provide a boost for beef and pork producers, reducing supplies of cheaper meat that could hurt demand for pricier steaks and chops. Through mid-October, US chicken slaughter was up 2 %from the same period in 2009, and had accelerated in recent weeks, according to government data.

 

All livestock producers face escalating costs through next year after a late-summer rally in corn, a primary feed ingredient. Earlier this month, corn futures reached the highest levels in more than two years, reflecting excess rainfall during August that led to a weaker-than-expected harvest.

 

December CBOT corn traded around US$5.71 a bushel, up 61% since the end of June. On October 13, corn futures hit US$5.88, the highest for a nearby contract since August 2008.

 

The run-up in corn prices clouds the financial outlook for top poultry producers such as Pilgrim's Pride and Sanderson Farms, and raises questions over expansion plans announced earlier this year.

 

In May, Pilgrim's Pride said it will resume production at three idled US processing plants by spring 2012, boosting its chicken production by 10 %, or about 3.5 million birds a week. Pittsburg, TX-based Pilgrim's Pride is scheduled to report quarterly results Friday.

 

Chicken prices likely will come under significant pressure in middle to late-November and December as increased supply comes on the market, the analyst said. "For some time, we expect processor margins to be very negative until supplies are cut."

 

While high US unemployment continues to stoke concern over consumer demand, beef and pork producers may still find support by tight supplies and strong exports that could keep prices high next year, she said.

 

Choice-grade wholesale beef averaged US$1.622 a pound on Tuesday (Oct 26), up almost 18% from a year ago, according to USDA data. Wholesale pork averaged US$0.76 a pound, up 38%.

 

"Domestic protein demand has been fairly solid, particularly in light of high prices," the analyst said. The foodservice business "seems to have stabilized, although definitive signs of growth are hard to come by," she said.

 

"We believe there is strong fundamental support, both supply and demand side, for higher beef and pork prices and we expect those to be sustained in 2011," she said.