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Processors See Possible Production Cuts Ahead

by 5m Editor
25 February 2009, at 11:07am

ARKANSAS, US - Poultry processors are predicting possible production cuts as the result of weaker demand.

Poultry insiders do not expect chicken demand to improve significantly before 2010, reports The Morning News of Northwest Arkansas. This indicates that more production cuts may be needed to help processors like Tyson Foods, Simmons Foods and Sanderson Farms to return to profitability.

Despite lower grain prices, chicken processing margins have averaged just 3 cents per pound since January. While that is an improvement over the negative margins from a year ago, it pales in comparison to the 7-cent margins in the same period of 2007, according to Farha Aslam, analyst with Stephens Inc.

Mr Aslam said corn prices fell 17 per cent in the recent quarter, when compared with a year ago, and soybean meal – the other main feed ingredient – is down about 10 per cent over the same period.

Industry leader, Tyson Foods Inc., would not disclose how much less it expects to pay in grain costs this year. However, its competitor, No. 4-ranked Sanderson Farms, said last week it expects to reduce its feed costs by $129 million from a year ago.

As grain prices have come down, so has demand for poultry, which is keeping the profits at bay for processors.

"We are seeing lower demand in the food-service customer base. We have made adjustments in bird weights to ensure our production meets with our customer's needs," said Todd Simmons, president of Siloam Springs-based Simmons Foods.

During its recent shareholders' meeting, the Laurel, Mississippi-based Sanderson Farms indicated it might be well into 2010 before the American consumer really returns to restaurants, saying "Because we don't expect much help from the demand side, chicken market improvement will have to come from supply cuts."

Sanderson Farms has reduced production by processing smaller chickens and has its plants running below capacity, the company told The Morning News.

Tyson Foods took a 5 per cent production cut in December, but said no further cuts are planned.

The National Chicken Council reports that production this year is running about 7 per cent behind last year's pace in terms of overall slaughter.

Production cuts measured by egg sets declined an average of 7.2 per cent each week of the quarter ending December, according to Mr Aslam. Last week, egg sets were 6.9 per cent lower than a year ago. Egg sets indicate what the supply will be about 60 to 90 days out.

When demand fell off in December, inventories began to rise rapidly, but deeper production cuts and a recent 3 per cent inventory sell-off are bringing the cold storage supplies back in line, according to Mr Aslam.

"The general industry inventory is decreasing month over month, and with the production cuts that are in place for the industry, inventories should decline to more favorable levels – down 12 percent in the last three weeks," Mr Simmons said.

Wholesale pricing remains mixed, whole bird prices are averaging 85 cents per pound, up 10 cents from a year ago.

Tyson Foods said recently that consumers are buying more whole birds and hamburger meat, passing up boneless chicken breasts and steaks in order to stretch the family budget a little further.

Wing prices are up and expected to remain high throughout the next month during NCAA Tournament play as spectators often want hot wings for snacks, said Richard Lobb, spokesman for the National Chicken Council.

Wholesale boneless, skinless breast prices have averaged $1.20 per pound this month, down from $1.35 a year ago, while leg quarter prices have also dipped to 35 cents per pound, from 40 cents a year ago.

"Given that grain costs are still relatively high and there is a degree of uncertainty with respect to demand, processors are likely to proceed with caution this year. They are not going to run production unless they have already got buyers," Mr Lobb told The Morning News.