Profit Tastes Like Chicken in Search for Cheap Meat

01:01PM Apr 15, 2014
fried chicken
( Wyatt Bechtel )

Record-high prices for U.S. beef burgers and pork chops are helping to make 2014 the most profitable year ever for chicken producers.

Americans are buying more chicken as a cheaper alternative just as fast-food restaurants including Yum! Brands Inc. and McDonald’s Corp. add new menu items from wings to club sandwiches. The sales surge has sent wholesale prices to an all- time high, boosted profit for processors including Tyson Foods Inc., and left Ozark Mountain Poultry unable to keep up.

"We’re sold out," said Ed Fryar, the chief executive officer of Rogers, Arkansas-based Ozark, which processes 3 million pounds a week. "Last fall, when I looked at 2014, I didn’t anticipate demand being as strong as it is. This is going to be a really good year for the industry."

With whole birds at U.S. supermarkets selling at half the per-pound cost of beef or pork, Americans will eat the most chicken in three years, while tight supply and high prices send red-meat demand to an all-time low, government data show. In a year when farm income is set to drop because of crop surpluses, the U.S. Department of Agriculture says poultry farms will earn $203,500 on average, the most on records going back to 1996.

Whole chickens sold by farmers in Georgia, the biggest producing state, rose 9.2 percent since the end of 2012 to a record $1.07 a pound on April 9, USDA data show. Wholesale beef gained as much as 26 percent over that period, fetching $2.2252 a pound yesterday, while pork advanced as much as 62 percent and sold for $1.2441 a pound yesterday.

Food Prices
Surging meat and dairy prices are helping to spur the fastest gain in consumer food costs since 2011, government data show. Beef is up after the U.S. cattle herd started 2014 at the smallest in 63 years, following years of drought and high feed costs. Pork gained as a raging virus that kills piglets spread to 28 states. Cattle and hog futures reached records last month.

While the rallies are boosting profit on all meats, chicken will be the "clear winner" this year, according to Tyson, the largest U.S. meat processor. "It’s the cheapest protein, or less-expensive protein," Donnie King, president of the company’s prepared-foods unit, told analysts on Feb. 27.

Even as demand increases, chicken supplies remain limited because producers were slower to expand output than they have during previous periods of improved profit. In March and early April, the number of broiler chicks placed for meat production were little changed from a year earlier, and egg hatchings trail the five-year and 10-year averages, USDA data show.

Expansion Begins
Rising output may start to send prices lower as early as next month, said David Maloni, a principal at the American Restaurant Association in Sarasota, Florida. The number of broiler eggs set in incubators reached 202.1 million in the week ended April 4, the most since July, and is holding above last year’s numbers, USDA data show.

"In the near term, we’ll go higher, but the bulk of the gains may be behind us," Maloni said. "We suspect you’ll see production expand versus 2013 in the coming months."

Red-meat prices have dropped this month. Wholesale beef slid 8.8 percent from a record high on March 18, and pork fell 7 percent from an all-time high on April 2, USDA data show.

The outlook is bearish outside the U.S. as feed costs rise and an outbreak of avian influenza erodes demand in China, the second-largest consumer, Rabobank International said in a March 28 report. Russia has a surplus, while shifts in trade patterns pressure prices in Europe and Brazil, the bank said.

Modest Expansion
Any output gains in the U.S. probably will be modest, keeping supplies tight and prices at the highest ever, the USDA said. The agency last week cut its 2014 production forecast to 38.5 billion pounds. While that would be a record, the 1.8 percent gain would be less than the 2.3 percent increase forecast in March and the 2.1 percent advance in 2013.

"The chicken industry has wanted to see this proof in higher prices before they were willing to increase supply," said Will Sawyer, a vice president at Rabobank in New York. Farmers will need to increase the size of the breeder flock to "materially increase production," he said.

A "meaningful change" in bird production won’t occur until the second half of 2015, Tyson’s CEO Donald Smith said at a March 12 conference.

With the Northeast boneless, skinless chicken breasts already up 23 percent this year at $1.5586 a pound on March 28, the highest for this time of year since 2004, prices may reach $2 by June or July because of a supply bottleneck, said Bill Roenigk, an economist at the National Chicken Council, a producer and processor group in Washington.

Avoiding Losses
Adding hens to the breeding flock won’t occur too quickly because farmers "don’t want to be in a situation where they can lose money again" from overproduction, Roenigk said.

Processors including Tyson and Pilgrim’s Pride Corp. posted losses in 2008 and 2009, and for parts of 2011, because of surplus output by the industry. In 2012, profit margins were eroded as a U.S. drought sent corn and soybean prices to record highs. As feed costs surged, livestock producers including hog farmers and cattle ranchers reduced herds. Chicken output fell in the third quarter to the lowest for the period since 2009.

It can take eight to 10 weeks from the time an egg is laid until the bird enters a processing plant, compared with a year to raise a hog to slaughter weight and almost three years for cattle. Poultry producers are able to respond more quickly to price changes, while cattle supplies have been slower to recover from the supply cuts in 2012.

Feed Costs
Expansion also is being limited by the rising price of feed, which accounts for 27 percent of costs on average. Corn futures in Chicago that plummeted last year because of a record harvest have surged 20 percent this year, while soybean-meal futures are up 21 percent in the past 12 months.

With chicken supplies increasing at an "extremely measured" pace, wholesale broilers, or young chickens suitable for cooking, will average $1 to $1.04 a pound this year, as much as 4.3 percent higher than in 2013, said Shayle Shagam, a USDA livestock, dairy and poultry analyst in Washington. That’s the highest since the USDA data series for a national, weighted composite began in 2009 and higher than the 12-city broiler price the agency used since 1978.

Even with the higher price, chicken is the cheaper meat. Retailers sold fresh, whole chicken at $1.544 a pound in March, compared with $3.698 for ground beef and $3.824 for pork chops, according to the Bureau of Labor Statistics. Americans will eat 82.7 pounds per capita this year, the most since 2011, while red-meat consumption drops to 100.9 pounds, the lowest since at least 1970, the USDA has projected.

‘Go-To Protein’
"Clearly, chicken is going to be the go-to protein," said Russell Whitman, vice president of the poultry division at commodity researcher Urner Barry in Toms River, New Jersey.

Restaurants are betting on the birds. Oak Brook, Illinois- based McDonald’s, the world’s largest fast-food chain, brought chicken wings back to its menu late last year and is offering a bacon club sandwich with an option of chicken or beef. Wendy’s Co., based in Dublin, Ohio, introduced an Asian cashew-chicken salad in March, while Burger King Worldwide Inc., based in Miami, said last month it began selling a Spicy Original Chicken Sandwich in January, noting that poultry is "a growing piece of the market."

Chick-fil-A Inc., a closely held fast-food chain based in Atlanta, surpassed Yum! Brands’ KFC unit as the largest U.S. chicken-focused restaurant in 2012 and last year widened the gap with sales of $5 billion, according to food industry researcher Technomic Inc. in Chicago. Meanwhile, Louisville, Kentucky-based Yum! Brands has added fryers to all its Pizza Hut restaurants to start home-delivery service of chicken wings, and the company opened a new sandwich restaurant in Arlington, Texas, called Super Chix.

‘Prosperous Year’
Prospects for rising demand have been a boon for Springdale, Arkansas-based Tyson, which gets most of its sales and profit from chicken. The company will earn a record $1.02 billion in the current fiscal year and $1.07 billion in the next, according to the mean of estimates by six analysts surveyed by Bloomberg. The shares are up 83 percent in the past 12 months, after touching a record $44.24 on April 1 in New York. Greeley, Colorado-based Pilgrim’s Pride, the second- largest U.S. producer, has more than doubled.

From Subway Restaurants’ sandwich shops to Jack’s Family Restaurants Inc., "they’re all pushing chicken," said Dennis Maze, who has been a chicken farmer in Blount County, Alabama, for 41 years and produces about 500,000 pounds every month. "We’re still putting it out at a reasonable price to the consumer. I’m looking for a very prosperous year in the chicken industry because of demand."