Knobias Clip Report (04-14-2008)
Submitted By Knobias ClipReport
Chicken Producers Cut Production Due to Higher Grain Costs
Food prices and supply were on the table again as social unrest in developing countries was becoming more prevalent. Shortages of rice, grain, and corn are resulting in prices doubling in the past year. Climate change caused yield decreases, low levels of stocks, higher consumption of meat and dairy in emerging economies, increased demand for biofuels production, and higher costs of energy and transport have all contributed to the price hikes.
The problem has spilled to developed economies as well as the US has seen increased inflation levels while China is expected to report inflation closer to double digits in its next report.
The increased prices of feed stocks caused Pilgrim’s Pride (PPC) to announce that it will cut production by 5% in the second half of this year. The Company is the largest chicken company in the United States and Puerto Rico and the second-largest in Mexico.
The Company also noted that it will continue to review its production facilities for potential mix changes, closure and/or consolidation in response to current negative industry fundamentals. Pilgrim’s Pride acknowledged that its processing complex in El Dorado, Ark., is among those being reviewed for possible closure. The 5% reduction includes the impact of the previously announced closing of the Pilgrim’s Pride plant in Siler City, NC, which should be completed by June.
The move mirrors the action taken by Cagle’s Inc. (CGL.A) last week. The Company announced a 4% chicken production reduction, mostly at the Company’s Pine Mountain Valley, GA location.
With the reduction in production, consumers should expect rising prices in poultry as soaring feed costs will be passed along in the form of less supply.
“Soaring feed-ingredient costs fueled by the federal government’s misguided ethanol policy has created a crisis in our industry, the true effects of which are only just now beginning to be felt by American consumers in the form of higher food prices,” said Clint Rivers, president and chief executive officer of Pilgrim’s Pride, in the release. “Over the past two weeks, a growing number of smaller chicken producers have announced production cutbacks in an effort to manage these unprecedented increases for corn and soybean meal, which are expected to add billions of dollars of cost to our industry this year.”
Doug Cagle, President and CEO of Cagle, said in the release, “Current chicken prices have failed to reflect the tremendous increase in the cost of feed. Ingredient prices, mostly corn and soybean meal, have increased over 80 percent in the last two years raising the cost to produce chicken by more than $.17 a pound. These are unprecedented times and given current USDA forecasts it appears that high feed costs are here for the foreseeable future.”
With the rising grain prices and production cuts, eyes are now focused towards rivals Sanderson Farms (SAFM) and Tyson Foods (TSN) to see if they also take action or attempt to benefit from the higher pricing power. Investors would be wise to watch.
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