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Chicken industry faces price cuts amid surplus

Breast meat will become even cheaper unless production is curtailed, analysts say, because the market is saturated with poultry, pork and beef.

October 28, 2006|From Reuters

CHICAGO — U.S. chicken producers face a challenge: cut production or watch breast meat prices fall even further than the seven-year lows notched this week in the wholesale markets, analysts said.

Consumers have yet to see dramatically lower prices for chicken breasts at grocery stores because supermarkets often are slow to pass on wholesale price declines. But shoppers could enjoy lower prices eventually if production remains high.

"They are going to have to cut production at some point -- more than what they have done. In an extreme case that could be closing a plant," said Paul Aho, an economist at Poultry Perspective, a poultry industry consulting firm.

The problem, according to Aho and others, is that there is too much meat, be it chicken, beef or pork.

Prices for chicken breasts, which are widely used at home and in fast-food restaurants, are extremely low.

One retail meat analyst said wholesale breast prices were the lowest he had ever seen for October. Although this has been good for some consumers, who have seen breast meat promotions of 99 cents a pound, analysts said it was not good for the meat companies.

The U.S. Department of Agriculture this week reported that boneless chicken breasts traded wholesale at $1.19 a pound in Georgia markets. A year ago they were about $1.34.

Leading chicken companies said some time ago that they would cut production to correct excess supply.

However, chicken supplies remain large and Aho estimates that year-to-date chicken production is still about 2% greater than a year ago.

Tyson Foods Inc., the No. 1 U.S. chicken producer, and its rival Pilgrim's Pride Corp. might offer some insight into their production plans next month when they release quarterly earnings data.

Earlier this month, the USDA estimated that chicken production would be up about 2% for the entire year and up 1.5% next year. In addition, the USDA estimates that year-to-date beef production is up 5.7% from a year earlier and pork is up 1.5%.

The latest excess of chicken cannot be blamed on bird flu, analysts said. Earlier this year, bird flu overseas hurt exports of U.S. chicken as foreign consumers turned away from the meat, which left more chicken in U.S. markets.

"This time it is a supply-side problem. There is too much chicken, too much pork, too much beef, too much protein in general," Aho said.

Sharply higher prices for corn and soybean meal, key feed ingredients, may force companies to cut chicken output.

"I think if you can't sell what you are producing at a high enough price and your input costs are going up, you have to cut production," said Len Steiner, an owner of the food industry consulting firm Steiner Consulting.

"They desperately need to do it, and they need to do it quickly," he said.

Corn futures prices on the Chicago Board of Trade are up about 50% since mid-August, closing Friday at $3.33 a bushel. Soybean meal prices there are up more than 15% during that period, closing Friday at $187.70 a ton.

The USDA on Wednesday reported that the number of eggs set aside to hatch meat-producing chickens was down 3% this week, an indication that some cutbacks are underway. But more may be needed, analysts said.

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