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Feed Costs Likely to Rise as Midwest Weather Worsens

by 5m Editor
20 October 2009, at 9:40am

ARKANSAS, US - The poultry sector is bracing itself for higher grain costs.

Rain in the Midwest grain belt threatens to wash away chicken profits for local processors, according to Frank Jones of Performance Poultry Consulting in Springdale.

Morning News reports him saying that the delayed grain harvests have pushed corn prices toward $4 a bushel in recent days, up from $3 just a few weeks earlier amid hopes of a bumper crop.

"It's the slowest harvest in three decades, with just 30 per cent of the soy beans and 20 percent of the corn harvested at this late date," said Brandy Carroll, market analyst with the Arkansas Farm Bureau in Little Rock.

She said heavy spring rains postponed planting and now an early frost, rain and chilly temperatures threaten the yield and quality of both crops – helping to push the commodity prices higher.

The anticipated crop bounty is turning into a so-so harvest and creating more pressure on operating margins for chicken companies, said Paul Aho, economist with Poultry Perspective.

Northwest Arkansas ranks No. 2 in the nation in terms of chicken production, according to the US Department of Agriculture. Tyson Foods Inc., Simmons Foods and George Inc. employ roughly 9,500 people in the region.

"Smaller processors will likely feel the sharpest pinch and growers will be squeezed by integrators tightening their belts," Mr Jones said. "But it won't be a Sunday picnic for the larger processors either. While most of the production jobs are likely safe, the next year won't be conducive for expansion or extra spending."

Chicken companies have lost an average of four cents per pound processed in October, according to Stephens Inc. Stephens noted negative processing margins for the industry since August.

Meat companies are also battered from weaker consumer demand and sluggish restaurant sales expected to persist well into 2011.

Corn represents about 30 per cent of the cost of raising a chicken, according to Mr Jones. The other main feed ingredient – soybean meal – is also more expensive as soybean prices have jumped 10 per cent this month.

Morning News reports that last week, J.P. Morgan analyst, Ken Goldman, cut his Tyson Foods' earnings estimates for fiscal year 2010, which began on 1 October. He attributed the weaker forecast to higher-than-expected grain costs resulting from the delayed harvests.

Goldman expects Tyson will show weak earnings in its chicken segment when the company reports its fourth quarter results Nov. 16. He said the chicken segment is operating at roughly a 2.2 per cent margin, well below the 5.9 percent margin achieved in the third quarter.

Some of that loss can be attributed to the normal downward cycle as chicken sales routinely shrink following Labor Day.

Mr Goldman also reduced his target price for Tyson Foods stock to $14, from $15 per share based on lower earnings projections. Tyson shares closed Monday at $12.29, down 12 cents.