Times are tough for the chicken business the Wall Street Journal reports. Pilgrim’s Pride will shut down another of the company’s chicken-processing plants in an effort to survive a vicious price squeeze in the poultry business. “Our industry’s business model is not sustainable at these [price] levels,” said Pilgrim’s Pride Chief Executive Bill Lovette on a conference call. The company will have 29 bird-processing plants after the Dallas plant closes. However, eight of the 29 facilities have already been idled.
Pork and beef producers are weathering the high grain price storm because of strong export markets. But chicken demand is more dependent on U.S. consumers, 20% or so that are unemployed or under employed. Ian Berry and Marshall Eckblad write,
The fact that chicken prices have continued to struggle is due to stubbornly high supplies and is a sign that the domestic market is saturated, said Russ Whitman, vice president for Urner Barry, which tracks the commodities sector. Boneless, skinless breast-meat prices are down 17% over the past year.
So while corn prices have doubled in the past few month, Pilgram’s hasn’t been able to pass on the input cost increase. “The ultimate source of the determination of prices is the value judgements of the consumers,” Ludwig von Mises wrote in Human Action.
Serving to pump up corn prices is a mandate from Congress to subsidize the production of corn-based ethanol. Now a third of the country’s corn crop goes to make fuel, up from 7% in 2001. “The dangerous fact is while government is hampered in endeavors to make a commodity cheaper by intervention,” wrote Mises in Omnipotent Government, “it certainly has the power to make it more expensive.”
Companies like Pilgrim’s Pride attempt to lessen input cost risk by speculating in futures markets. However, in Pilgrim’s case these bets didn’t work out.
Pilgrim’s also indicated it made wrong-way bets on the price of corn, reporting $5.7 million in net mark-to-market losses in its derivatives portfolio as corn prices dropped sharply in late June after hitting a record high of nearly $8 a bushel early in that month.
The corn price has backed off to $6.68 a bushel as I write. Though not close to its record high, corn has more than tripled since 2005 when it fetched less than $2 a bushel. During the same time the price of whole chickens has increased just north of 11% according to the Bureau of Labor Statistics.
Pilgram’s Pride filed for bankruptcy in 2008 and continues to struggle as does chicken processor Townsend, which announced last week was closing all of its operations by November. Nearly 1,000 workers will be sacked from two plants in North Carolina and contracts with 200 chicken farms will be terminated. Ukrainian billionaire Oleg Bakhmatyuk, “just decided to shut it down and take his losses and go on,” said David Purtle, a former Tyson Foods executive who was hired to be Omtron’s CEO. “He just didn’t like the environment in this country and the lack of discipline that the poultry industry had.”
All this bad news must mean the days of cheap chicken will be over soon.
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Maybe they should find something else for the chicken to eat, perhaps bugs and grasses.
Which would just make it even more expensive than it is now. Grass fed beef makes the increasing cost of corn fed look cheap.
So much for the days of “a chicken in every pot”.
It is not only stupid government subsidies that are driving up the cost of corn. Another major factor is the increase in the price of oil (when priced in dollars). As the dollar continues to drop in value, the price of oil will go continue to go up. Oil is not only used to power farm equipment, but is also used to make fertilizers and insecticides.
(Incidentally, it is 10 years since I last painted my house. I was shocked to find out how expensive paint has become. Again, it is an oil based product. Last time I painted my house, oil was $24 a barrel.)
So the Justice Department sues to prevent one producer from buying up a non-competitive processor’s plant: http://www.justice.gov/atr/public/press_releases/2011/270975.htm
The government’s objective is to drive all businesses out of the United States
That way the US can enjoy the comparative advantage of printing dollars while the rest of the world enjoys the comparative advantage of making actual products.
Sounds like Rome.
If only we had a chicken Czar to bring order to the marketplace.
“Companies like Pilgrim’s Pride attempt to lessen input cost risk by speculating in futures markets. However, in Pilgrim’s case these bets didn’t work out.”
hedging appropriately doesn’t preclude money losses.
It doesn’t sound like proper hedging if making a wrong bet means you loose money. Proper hedging would have meant calculating how much money it would cost you if corn went up by X and then taking a position to offset that extra cost. What it sounds like is that they actually decided to try to make money off off their “hedging” operations, took too big a position and unsurprisingly lost. (I doubt they have much of a comparative advantage in security trading)
It also sounds to me like the idea that they can’t pass the extra costs to consumers is absurd. Obviously, not everyone is unprofitable or we wouldn’t see chicken on supermarket shelves. This sounds like the market is purging some less efficient firms. It’s hard for the ones who work there, but that’s a normal and healthy process even if government tinkering is making things a bit worst than they would have to be.
to p.f.:
if they fix their corn purchase cost via futures, then the loss if the market price turns down is real. of course, they can now source corn more cheaply on the spot market, but this is an opportunity profit only.
now i don’t know what they actually did, but taking losses on futures positions doesn’t per se mean the hedge has failed in its intent.
This is just another Obama “Nanny State” conspiracy. Obama will conquer the scourge of obesity by making food so expensive that it discourages over-eating.
“Tofu in every pot!”
Ask any meat or dairy farmer what he thinks of the current corn prices and he most surly will say, ethanol is killing us. Though, it sounds as if there were more problems than just corn prices with pilgrims pride. Also, I raise chicken on pasture (eating bugs and grass) but chickens still need grain. Pasture raised chicken is top quality but it takes longer, there is only 20% feed cost reduction, and involves more work. All of these factors are reflected in the cost which is higher than store bought organic chicken.
http://www.huffingtonpost.com/2011/08/17/chicken-prices_n_929132.html
The US Department of Agriculture recently announced plans to buy $40 million of chicken from poultry farmers in an effort to support sagging profits in the $45 billion industry, CNN reports.
Prices for chicken feed have risen in the past several years (along with other commodities prices). But at the same time, the sluggish economy has depressed consumer demand for meat, keeping retail prices low. These two factors have dealt a harsh blow to the poultry industry, 58.5% of which is controlled by four major producers: Pilgrim’s Pride, Tyson, Perdue and Sanderson.
The USDA has bought tens of millions of dollars worth of chicken each of the past several years; this year’s buy is the largest since 2008. The policy is part of the Department’s much-contested farm subsidies program, which was cut significantly in May. Subsidies were first instituted during the Great Depression as a way to support farmers even in periods of agricultural over-production.
The USDA will donate its $40 million of chicken to food banks around the country. The expenditure represents a tiny fraction of the Department’s total budget, which was expected to total $150 billion for the 2011 budget year.
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