Soaring feed costs have erased profit prospects for some U.S. pork and poultry producers next year, curbing expansion plans and likely forcing a cutback in chicken production, agribusiness and food industry analyst Heather Jones said.
As corn rallied above $5 a bushel, estimated 2011 hog production margins slipped to a loss of $4 per slaughter animal from a per-head profit of $4 three weeks ago, Jones wrote in a report today. Current margins are also in the red, said Jones, who’s with BB&T Capital Markets.
Chicken producers are also expected to lose money next year, which probably will stall the industry’s recent expansion, Jones 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,” Jones said in the report. “Thus, we expect a meaningful reduction in supply,” beginning in early 2011.
In the pork business, producers probably will “halt their nascent expansion and potentially return to contraction mode,” Jones 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, U.S. chicken slaughter was up 2 percent 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 corn futures in Chicago traded around $5.71 a bushel, up 61 percent since the end of June. On Oct. 13, corn futures hit $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 Corp. and Sanderson Farms, Inc., and raises questions over expansion plans announced earlier this year.
In May, Pilgrim's Pride said it will resume production at three idled U.S. processing plants by spring 2012, boosting its chicken production by 10 percent, or about 3.5 million birds a week. Pittsburg, Tex.-based Pilgrim’s Pride is scheduled to report quarterly results Friday.
Chicken prices likely will “come under significant pressure” in mid- to late-November and December as increased supply comes on the market,” Jones said. “For some time, we expect processor margins to be very negative until supplies are cut.”
While high U.S. 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, Jones said.
Choice-grade wholesale beef averaged $1.622 a pound yesterday, up almost 18 percent from a year ago, according to USDA data. Wholesale pork averaged 75.95 cents a pound, up 38 percent.
“Domestic protein demand has been fairly solid, particularly in light of high prices,” Jones 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,” Jones said.
In Tuesday’s trading, December live cattle futures in Chicago fell 0.55 cent to $1.0085 a pound. December lean hogs rose 0.225 cent to 68.7 cents a pound.