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Profits Return for Chicken Sector

2 May 2012, at 10:03am

US - Amid all the hubbub over spring planting, finely textured beef, BSE and everything else, we have — apart from our comments about weekly and monthly production figures last week — devoted little time over the past few weeks to the poultry sector, writes Steve Meyer and Len Steiner.

Things have turned around for chicken producers and the turkey sector is seeing slightly lower prices for some flagship products amid some expansion of output but, given all that has happened to pork and beef the past few weeks, these sectors are enjoying some success. Probably not the way one wants to assume the mantle of success but we think chicken companies in particular will take better results any way they can find them!

The good news for the chicken sector is that profits have returned. The bad news may also be that profits have returned.

After 14 months of frequently-huge losses, our broiler profit model showed a return to the positive for broiler returns the second week of this year. Margins quickly jumped to 5 cents/lb. in January (that compares to losses of 5-15 cents/lb. for much of 2011) and have remained at 5 to 8 cents per pound since then.

Those profits are not enough to drive any robust growth but the broiler breeder flock began growing as soon as black ink returned. Profits are not the only reason for the return to growth since, the broiler breeder flock usually reaches a seasonal low in November or December and begins growing in December or January before peaking in April or May.

It will take many months to return the broiler flock to the level it was before the most recent down-sizing — if it ever returns to that level. The November flock was the smallest in 14 years and was 5.4 million birds smaller in March than it was at its most recent cyclical peak in May 2011. The flock has grown by 570,000 birds since November but remains 7.9 per cent smaller than one year ago. The smaller breeding flock and associated reductions in egg sets (-5.2 per cent YTD), chick placements (-four per cent YTD), slaughter (- 5.4 per cent YTD) and production (-5.3 per cent YTD) have finally had a positive impact on chicken prices. The broiler cutout value which we compute from separate chicken cut prices rose over 3.5 cents/lb. last week to reach 98.82 cents/lb., its highest level since the surge of mid-2004 took it to a record $1.10/lb.

The odd thing about the cutout rally is the source of its strength — wings and leg quarters. Both have stayed at significantly higher prices that last year through April with wings near $1.80/lb. all year (compared to about 80 cents/lb one year ago) and leg quarters holding very near 53 cents/lb. versus 35 at the beginning of 2011 and 48 cents/lb. one year ago last week. Chicken tenders have joined the strengthening in recent weeks, rallying to $1.77/lb., about 11 per cent higher than one year ago. Boneless breast prices have steadily risen to reach $1.37/lb. last week. That is slightly higher than last year but still 5 cents/lb. lower than the 5-year average. And don’t expect a lot of help from this cut. Weights are up 1.5 per cent higher so far this year as more and more large boning birds are included in the product mix. Those birds yield large amounts of breast meat and will keep the market under pressure.

Turkey producers have responded to nearly three years of profits — and some LARGE profits among those — by increasing output slightly so far in 2012. While 1.7 per cent doesn’t sound like much, it has put some pressure on breast and thigh meat prices and kept whole hens near year-ago price levels. As long as feed costs do not grow significantly, those prices are enough to keep producers profitable this year — provided they do not expand output too much. The turkey market appears to be pretty sensitive to output changes.

What should you expect? First look for broiler production figures to go above year-agolevels — just because they are going to be compared to some very low numbers from 2011. Second, watch wing prices to see if the sector can maintain this source of value. They have defied their “post Super Bowl” swoon. Can they stay high all year? Leg quarters will indicate the status of exports.