Corn prices have made a “structural shift” to high levels that pork, beef and chicken producers must contend with well into next year, Tyson Foods, chief executive Donnie Smith said.
In the wake of corn’s rally above $7 a bushel, the average cost of a slaughter-ready chicken has nearly doubled, to about 45 cents a pound, since the middle of the previous decade, Smith said at a Sept. 7 investor conference sponsored by Barclays Capital.
“That’s a huge structural shift that, frankly, our industry is getting used to,” Smith said. “For years, our industry was used to having 25 cents a pound live going to the plant.”
The U.S. poultry industry ramped up production last year and earlier this year as profits improved following a previous spike higher in grain prices, in 2008. But the recent corn market upswing prompted chicken companies to scale back output, Smith said, and additional cuts are likely this fall.
“Our industry got a little ahead of itself” with recent production increases, Smith said. “What we’re seeing is a structural shift because of these high grain prices.”
In trading Sept. 8, corn futures for December delivery fell 14 cents to $7.34 a bushel. Based on current futures prices, corn is expected to trade above $7 at least through July 2012. In June, corn futures touched a record $7.99 ¾.
From 2000-06, corn averaged $2.28 a bushel, based on the closest-to-expiration futures contract.
As the top U.S. poultry processor, Springdale, Ark.-based Tyson is one of the biggest domestic corn buyers, and like other livestock feeders saw profit come under pressure this year. High feed costs, combined with weak chicken prices, contributed to a 21-percent drop in Tyson’s net income during the quarter ended July 2.
Corn’s run-up reflects a “paradigm shift” for the market, Smith said, that follows a federal renewable fuels mandate, created in 2005, requiring increasing ethanol use in the U.S. motor fuel supply. Most ethanol in the U.S. is made from corn.
In the 2010-12 marketing year, corn consumption by the nation’s ethanol industry totaled 5.02 billion bushels, surpassing use by livestock feeders for the first time, according to the U.S. Department of Agriculture.
Despite higher feed costs, Smith said Tyson is poised for near-record earnings for the full year as improved efficiency and the company’s large share of beef, chicken and pork production outweigh high feed costs and a sluggish economy.
“Efficiency improvements in protein segments over the past several years have created very competitive operations and delivered sustainable earnings improvement,” according to Smith’s presentation. He said the company has “diverse” sales of the three major meats in all distribution channels, including retail, foodservice and exports.
Tyson controls about 22 percent of U.S. production in both beef and chicken and 17 percent in pork, according to the presentation.
In a May statement, Tyson said it expected to spend $500 million more on grain in 2011 compared with 2010. That would be a jump of nearly 13 percent over the approximately $4 billion the company spent on grain last year, according to analyst Stephen Share, who’s with Morgan Joseph TriArtisan LLC in New York.
In after-hours trading Sept. 8, Tyson shares rose 10 cents to $17.28, down 14 percent from a 12-month high of 20.12 reached in May.