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November 1, 2011

 

US chicken processors ask retailers, eateries to share cost

 

 

Affected by unstable feed prices, an increasing number of US chicken processors are requesting supermarkets and restaurants to share more in the risk.

 

Pilgrim's Pride Corp. aims to sign sales contracts with retailers and eateries that track the company's number one cost, feed. Smaller, closely held processors are taking similar steps after corn prices hit record highs in June and remain at historically high levels, according to analysts, restaurant managers and industry executives.

 

"These are big changes in how we handle our book of business," William Lovette, chief executive of Pilgrim's, told investors Friday (Oct 28) after the company posted a third-quarter loss of US$162.5 million. The company's losses have totalled more than US$400 million so far this year.

 

Going into annual negotiations this fall, chicken processors are pushing for contracts that adjust with swings in the grain market. They are also looking to sign sales agreement of a shorter duration so as not to get caught for months on the wrong side of a surge in feed costs.

 

"As contracts come due, people are less willing to do a year. They will only do six months, or even a quarter at times," said Michael Mack, chief executive of Garden Fresh Restaurants, which runs 112 eateries in 15 states.

 

Processors have an added incentive to shrink contract terms. Analysts forecast chicken prices will rise by around 5% by the middle of next year as production cuts finally take hold.

 

Restaurant chains and grocers may have little choice but to accept the new contract terms, as high prices for beef and pork limit their flexibility to change menu items and selections in meat cases. They also face an increasingly consolidated poultry industry in which a growing number of processors are pushing for contract changes.

 

Lovette said customers are accepting the new types of contracts. "They understand the business has to be sustainable in order to ensure them supplies in the future," he said.

 

Chicken processors are following a strategy started by Tyson Foods Inc. after the last spike in commodities in 2008. For years, most have signed 12-month supply agreements and in some cases, far longer as a way to lock up business and boost market share. Tyson has said it plans to expand its use of short-term contracts and contracts tied to feed costs.

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