By Todd Southerland, Agribusiness Consultant
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The U.S. poultry industry has become increasingly supply-driven. Processors have increased their slaughter rates in order to decrease the supply flock, increase commodity chicken prices, and return the market to equilibrium. At this juncture, the industry has reached a fair balance between supply and demand, as demand remains generally robust in light of the broader economic climate. Both buyers and producers should expect a relative degree of price stability for the next few quarters, since there appear to be no broader factors that will cause significant price movements beyond standard volatility from seasonal fluctuations.
In 2013, production has slowly begun to expand, but with chick placements exhibiting nominal growth over the last few months, it appears that supplies will remain at reasonable levels through the traditionally strong summer selling season. When combined with a robust export market, moderating cold storage inventories, and record-high beef prices, market prices should remain strong until the fall season, and continued profitability among processors should be expected. The focus over the next several months will be on grain prices, and current indications point to a much improved corn crop that could result in significant declines in grain prices.
The chicken industry has historically responded to margin volatility and variable demand patterns through changes in production, which reflects a relatively efficient market in the sense that processors are responsive to market forces. Production declines in 2012 were based on a trend of significantly declining egg sets and chick placements; conservatively increasing placement has helped to moderate production levels over the last several quarters.
The chart below provides a historical overview of weekly egg sets and chick placements, the key leading indicators for near-term changes in supplies, and suggests that any significant expansion in supplies over the near term is unlikely.
While there has been a head count restraint, there has also been a remarkable increase in feed efficiency and bird sizes over the past several decades. As shown in the chart below, average live bird weights in 2013 have reached 5.9 pounds, which is 18% higher than the beginning of the 2000s and nearly 2.0 pounds higher than the early 1980s.
The following chart provides a good indication of the market price risk that is faced by chicken processors. The data in the chart is a historical overview of chicken parts pricing as determined by the Georgia Department of Agriculture, one of the leading sources of price discovery for the poultry industry and the predominant market-based resource used to determine commodity selling prices. This chart has been compiled using a weighted average of each chicken part as a percentage of the whole bird.
Notably, the industry did not experience any significant increase in 2011 pricing that is usually enjoyed during the typically strong summer selling season, but there has since been a rally in the poultry market due principally to heightened wing prices in 2012 and stronger breast meat prices in 2013. With no significant expansion in chick placements on the horizon, supply restraint has rewarded processors with significantly improved metrics throughout the spring and summer, and it appears this trend will continue through the summer selling season.
Poultry market prices are one of two critical determinants of profitability that are generally beyond the control of processors. Feed cost inflation over the last several years has been the result of significant increases in corn and soybean prices, and this dynamic will continue to pressure margins. Estimated broiler processing margins have strengthened considerably in 2013 due to improved market prices, but they remain highly susceptible to fluctuating grain prices.
Wells Fargo Agricultural Industries presents this analysis as a complimentary service to its employees and customers. It cannot guarantee the accuracy of all the sources of data. And, commodity prices are extremely volatile based on unforeseeable changes. These estimates will change with all new market changes.