Chicken

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Morgan Alcalay

The U.S. poultry market totaled $43 billion in chicken sales in 2007.^[1] Chicken prices are highly dependent on chicken feed prices. In fact, feed costs make up 65% of the cost of raising a chicken.^[2] Reliance on corn chicken feed (especially distiller's dry grain--see DDG under Ethanol Production) makes chicken prices susceptible to significant changes in corn prices.^[3] Although the skyrocketing cost of corn has increased the cost of producing chicken by more than one-third in early 2008, large domestic supplies have left retail prices relatively unchanged .^[4][5]

^[6]

Who Benefits From Higher Chicken Prices?

• Pilgrim's Pride (PPC) and Tyson Foods (TSN), examples of major public chicken protein processors (they hold 25% and 20% of US market share, respectively), benefit when chicken prices rise.^[7]
• Smaller, private chicken producers and processors, such as Perdue Farms with 8% of US market share and Wayne Farms with 5% of US market share, also benefit when chicken prices rise.^[8]
• Chicken feed and feed additive companies, such as Land O'Lakes, Inc. benefit from higher demand of chickens, which results in increased demand for their products.

Who Benefits From Lower Chicken Prices?

• Yum! Brands (YUM), owner of Kentucky Friend Chicken, and AFC Enterprises (AFCE), owner of Popeyes Chicken, are examples of chicken-centric fast food chains that purchase large quantities of chicken and are highly effected by fluctuations in chicken pricing.
• ConAgra Foods (CAG) and Kraft Foods (KFT) are packaged food producers that also buys large quantities of chicken.
• Supermarkets such as Wal-Mart Stores (WMT), Safeway (SWY), and Kroger Company (KR) purchase large quantities of fresh and packaged chicken who benefit from lower chicken prices.

Trends and Forces

Increase in Feedstuff Prices Increases the Price of Chicken

Chicken prices are heavily dependent on favorable pricing of feedstuffs, such as corn prices and soybeans, as feed makes up the majority of the cost of raising poultry. Corn prices have risen sharply since the beginning of 2007 - more than 150% in 2007 and early 2008 - as ethanol producers have increased their demand for the commodity (rising oil prices, in turn, have increased demand for ethanol).^[9] Corn is also the main input for many other food products such as high fructose corn syrup that are in increasing worldwide demand - but nonetheless the USDA expects U.S. farmers to plant 8% less corn in 2008, lowering supply and increasing prices.^[10] Additionally, the June 2008 flooding of Iowa is expected to destroy more than 200 million bushels of corn, further reducing supply.^[11] Any long-term, significant increase in feedstuffs prices has the potential to seriously increase chicken prices.

Constantly Changing Global Supply and Demand Cause Prices to Fluctuate

Though chicken prices are mostly responsive to input feed prices, they are also affected by international competition, high domestic production, seasonal fluctuations, and fear of avian bird flu. Though only 16% of total domestic production was exported in 2007, international competition can drive chicken prices up or down.^[12] Strong export markets have been the main drivers of the poultry industry's growth, so a global surplus has an adverse effect on domestic producers.^[13] Global surpluses can be exacerbated by domestic surpluses, the shortest of which can cause long lasting price swings.^[14] Next, seasonal hatchings create a variable supply of chickens which in turn cause prices to fluctuate. Finally, fears of avian flu decrease chicken demand, and therefore chicken prices, as consumers react to outbreaks of the disease and substitute other protein sources, such as pork or beef, for chicken.^[15]

Chicken Producers Hope to Transition to Prepared Foods

Chicken producers are transitioning to prepared foods, such as breaded chicken strips, buffalo wings, and chicken nuggets. These products carry a higher margin than fresh chicken, because they are sold one step closer to the consumer on the supply chain - to stores, rather than to butchers who then mark up the meat once again before selling to stores. Furthermore, for companies such as Pilgrim's Pride (PPC), prepared meats decrease feed costs from 33-49% of total production cost to 17-24% of total cost.^[16] Rising commodity prices factor into the price that consumers must pay for their chicken, but these input costs cannot be passed on in their entirety. By eliminating an extra step in the sales process, chicken producers can pass a higher percentage of production costs onto the consumer as well.

Chicken Industry Information and Market Share

Pilgrim's Pride (PPC) is the largest producer of US chicken with 25% of the US market.

Tyson Foods (TSN) is the second largest producer of US chicken with 20% of the US market.

Perdue Farms is the third largest producer of US chicken with 8% of the US market.

Wayne Farms and Sanderson Farms (SAFM) are tied as the fourth largest producers of US chicken with 5% apiece of the US Market.

^[17]

Note: Market share data from Pilgrim's Pride Corporate Fact Sheet

References

1. ↑ US Economic Research Service, "U.S. Broiler Industry: Background Statistics and Information"
2. ↑ The Sacramento Bee, "Midwest flooding will raise corn prices, soak food buyers"
3. ↑ US Economic Research Service, "Corn Prices Near Record High, But What About Food Costs?"
4. ↑ The Sacramento Bee, "Midwest flooding will raise corn prices, soak food buyers"
5. ↑ AgWeb.com, "Cold Storage Report Highlights"
6. ↑ US Economic Research Service, "U.S. Broiler Industry: Background Statistics and Information"
7. ↑ Pilgrim's Pride Corporate Fact Sheet
8. ↑ Pilgrim's Pride Corporate Fact Sheet
9. ↑ National Corn Growers Association Futures Quotes
10. ↑ Associated Press, "USDA Bets on Soy, but Farmers Like Corn"
11. ↑ Reuters, "How much crop acreage lost to floods?"
12. ↑ US Economic Research Service, "U.S. Broiler Industry: Background Statistics and Information"
13. ↑ Charleston Regional Business Journal, "Chicken prices: Gradually coming back to Earth"
14. ↑ Poulvet.com, "Challenges and opportunities for marketing of poultry products"
15. ↑ US Department of Agriculture, "Meat and Poultry Prices Rise"
16. ↑ PPC 2007 10-K, Item 1, pg.5
17. ↑ Pilgrim's Pride Corporate Fact Sheet