July 15, 2011

Fitch report holds favourable outlook for US beef and pork industries

A report published by Fitch Ratings has indicated a favourable outlook for the beef and pork segments of the US proteins industry, as strong exports and tight global supply are driving pricing and profitability.

In contrast, the US chicken industry has been generating losses since the end of 2010 due to excess supply, weak pricing and elevated feed costs.

"High grain costs will continue to cause margin pressure in the near-term, but recent pullbacks in production could signal capitulation for the chicken producers," said Carla Norfleet Taylor, Director at Fitch Ratings. "The industry should experience a modest increase in chicken prices towards the end of 2011."

While feed costs affect producer profitability, Fitch believes other factors, such as robust pricing, strong exports, and relatively inelastic domestic demand, are currently playing just as large a role.

The quarterly report also includes Fitch Ratings' assessment of the USDA's latest forecasts, released July 12, 2011, along with a synopsis of industry data used to gauge the health of the US protein industry.

Feed-price ratios, egg placements, hog farrowing, cattle on feed, and exports are some of the indicators that provide insight on trends surrounding production, supply, and global demand.

Fitch rates through the protein cycle for its universe of rated companies due to periodic supply/demand imbalances which cause volatility in the industry's operating earnings and cash flow. Key rating drivers include each firm's financial policies and Fitch's view regarding the company's ability to manage through risks inherent in the business.