September 12, 2003
US Turkey Producers Plan 2004 Production Cuts
Stung by two years of losses, many U.S. turkey producers are planning to reverse a pattern of steady production increases with cuts in 2004. Others may have similar objectives, but are not yet ready to show their hand.
U.S. Department of Agriculture figures show a steady production rise every year since 1998, and company officials and market analysts linked the profitability problem to overproduction along with slower deli demand.
The question of how much production will be cut and in what product areas has yet to be answered. Some companies gave Oster DowJones sketchy outlines of their plans, but others provided only hints or did not return telephone calls.
Market analysts said consumption of turkey deli products has been declining, so the biggest problem area for producers is breast meat for further processing into deli products, which comes from large de-boning birds. But prices for smaller turkeys for home consumption also have been less than stellar.
All responding companies cited poor market conditions as their reason for cutting back, and the sketchy details that were given indicate production cuts may be significant.
Sue Trudell, vice president of poultry analysis for Sparks Cos., said she expects a significant drop in slaughter of large de-boning turkeys in early 2004. Summer breast meat markets finally rose from record lows earlier this year, but "frozen stocks are still at all-time highs, and we could see markets set new lows in early 2004 unless fresh production is cut substantially," she said.
Sparks estimates show processors losing "at least" $0.10 a pound for meat sold at the wholesale level during 2003, Trudell said. Internal use of meat by integrated companies may reduce the losses for some firms, but "few if any" turkey growers or processors are making money.
Gary Lohr, president of Lohr Associates, agreed that 2004 production levels could decline and said he expected output to be down less than 1% overall, although slaughter rates could be down 1% to 2%.
Low prices for feed this year helped producers offset some of the lower prices for birds, Lohr said. But cheap grain won't be available next year, following dry conditions and swiftly declining crop condition reports out of the Midwest. The "huge" stocks in cold storage of parts and meat products is weighing on the market and forcing the cuts, he said.
Cargill Inc. can't be counted as one that plans to pare 2004 production since it already did so by lopping off some Texas production. The company's public information officer Mark Klein said there has been an oversupply of all animal protein for the last few years, and when Russia banned poultry imports last year, "it really backed things up."
Cargill was listed as No. 1 producer by Watt Poultry USA in January, accounting for 1.24 billion pounds live weight, or roughly 17% of total U.S. turkey production.
Hormel's Jennie-O Turkey Store, a vertically coordinated producer close behind Cargill in turkey output, announced Aug. 21 that it planned to shave 5%, or 60 million live-weight pounds, off next year's turkey production.
Julie Craven, director of Hormel public relations, said there was no breakdown of which portion of the company's production would see the largest cuts. The firm produces smaller birds for family consumption and large de- boning turkeys.
Craven said the growers were aware of the coming changes.
Pilgrim's Pride officials were elusive, but a market analyst said rumors were circulating that it intends to trim production by 3.0 million heavy toms.
The Pilgrim's Pride Web site, however, carried its July 10-Q filing with the U.S. Securities and Exchange Commission, which said, "The company has recently taken steps to reduce its turkey production levels by approximately 15%, which will take effect early fiscal 2004 in an effort to mitigate future losses." These losses were related to a recall of deli turkey products from its Franconia, Penn., plant and an avian influenza outbreak in the spring of 2002.
Prestage Farms Inc. spokesman Ray Johnson said the company plans to reduce production by 10 million pounds next year. Prestage Farms customers predicted lower demand for the year, so total production will be cut as well.
Prestage Farms is expected to produce about 400 million pounds of turkey this year, Johnson said. The company slaughters hens for consumer packaging, plus sells live large toms to other companies for de-boning.
Cathy Pernu of Kraft Foods's; Louis Rich Turkey did not give any details about volume or percent of 2003 production but did say the firm planned to buy fewer deboning turkeys next year because of declining trends in breast meat consumption that began several years ago.
Dan Lennon, president of the Michigan Turkey Producers Cooperative, said current plans called for 5% less production in 2004. Cuts would come "in the first quarter plus."
Lennon said about 250,000 fewer birds would be produced with an average live weight of about 37 pounds. In 2002, the cooperative produced about 160 million pounds live weight.
Michigan Turkey Producers and other companies ended last year with so much product in the freezer that it delayed seasonal price hikes at the start of the summer deli season, and made for a tough financial year. Lennon saw the planned cuts as a typical response to too much supply.
A Farbest spokesman declined to comment on production plans, but competitors and other industry sources estimated cuts of 4% to 5% for 2004, from production estimated at roughly 200 million pounds live weight this year.
A representative for Cooper Foods could not be reached for comment, but trade sources expect the company to knock off the equivalent of one day a week of production.
In response to the hard times in turkey land, the U.S. Department of Agriculture on Aug. 4 earmarked $20.0 million for a bonus buy of turkey. The meat will go toward various entitlement programs including school lunch and family programs and is to be delivered through the USDA's Food and Nutrition Services, said Craig Morris, assistant deputy administrator of poultry programs for the USDA's Agricultural Marketing Service.
That is in addition to what the USDA buys for its school lunch program. Cathy Smith, contracting officer for AMS's; poultry division, said from July through December 2002, the agency spent $55.1 million to buy 56.7 million pounds of turkey for school lunches and other federal feeding programs. Data from January through June was not available.
Prior to Aug. 4, the USDA had purchased almost $11.0 million in deli turkey breasts, representing more than 7 million pounds, a USDA news release said. In fiscal year 2002, the USDA spent more than $13.3 million for nearly 9 million pounds of turkey products.
From July 2001 to June 2002, AMS spent $64.1 million to buy 67.1 million pounds of turkey, Smith said, and from July 2000 to June 2001, $65.1 million for 64.1 million pounds.
The AMS got a better deal on turkey from July 1999 to June 2000 when it spent $58.7 million to buy 71.3 million pounds of turkey.
Alice Johnson, president of the National Turkey Federation, said bonus buys are something the AMS does when economic situations warrant. Turkey processors and growers are losing money, and there is a large amount of product in storage, so the NTF requested the bonus purchase.
Export markets are down 10% from last year because of trade barriers in countries like Russia and Mexico, and U.S. consumption is flat, Johnson said. She said the industry needs to do more work toward better marketing of its product. It needs to educate people to think of turkey as more than a Thanksgiving meal and a sandwich meat.