Higher feed costs due to the Midwest drought could severely impact the profit margins of U.S. chicken producers in the coming months, analysts said.
Standard & Poor’s Ratings Services this week revised its credit outlook for Pilgrim’s Pride Corp. to negative, saying it was concerned about the company's ability to raise prices on its chicken products to offset higher feed costs in contract and pricing discussions that typically occur with key customers during the fourth quarter of the calendar year.
The outlook change reflects “the risk that earnings may decline significantly by the fourth quarter of fiscal 2012 and into 2013 if pricing actions don't fully offset higher feed costs,” S&P said.
Pilgrim’s feed costs are hedged through September 2012 but will rise closer to current market prices by the fourth quarter of fiscal 2012 and remain at those levels into 2013, S&P said.
Stephens equity analyst Farha Aslam, citing industry sources in a research report on Thursday, said chicken prices would have to increase 10 percent to 12 percent from current levels for companies to offset the increase in grain costs and break even and would have to increase 15 percent to hit normal mid-cycle profit levels.
Production cuts coming?
Aslam noted that Tyson Foods expects a production cut of 3 percent to 4 percent is needed to pass along higher grain prices but said the company does not plan to cut its output.
Pilgrim’s Pride has indicated that volumes would be flat in its fiscal fourth-quarter ending in December and that future production cuts would be moderate, Aslam said.
With Tyson and Pilgrim’s making up 45 percent of the industry, “this implies that the remaining 55 percent of the industry will likely have to cut production by 8 percent to 10 percent,” she wrote.
BMO Capital Markets analyst Kenneth Zaslow, who recently attended a feed industry symposium, said attendees at that event shared a widespread view that chicken production cuts will take place and that feed demand must lead to corn demand rationing. But he noted that chicken producers have yet to begin reducing weights.
“The consensus view that the unfavorable chicken margin outlook will eventually drive production cuts appeared more hopeful than based on empirical evidence,” Zaslow wrote in a report to clients.
Producers may begin to make production decisions in the next 30 to 90 days, he said, but he cautioned that the magnitude of any cuts may not ration feed demand as much as needed.
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