Poultry profitability is coming under pressure as prices decline amid growing supplies. A new report from CoBank says the U.S. chicken industry has experienced an unprecedented run of historic profitability since 2012 and responded by significantly increasing production and processing capacity.
Six new poultry processing plants are expected to be operating by 2020, while production and supplies of competing animal proteins are expanding. Current projections for chicken production growth are 1.5 percent, which is well below the 2.5 percent average rate in the last five years.
However, CoBank economist Will Sawyer says lessons learned from the last market downturn have driven important changes, strengthened the industry and made it more resilient to a potential market slide. Many chicken companies found themselves with burdensome levels of debt that became unsustainable when corn prices more than doubled in 2008 and 2009. Today, the average chicken producer has almost as much cash on hand as debt on their balance sheet, making them far more resilient to any downturn in chicken prices and margins.
Source: National Association of Farm Broadcasters
Poultry Outlook | CoBank Knowledge Exchange Brief
The U.S. poultry sector’s recent history can largely be divided into two periods: before 2012 and after. 2012 is the demarcation point because feed costs set a historic peak that summer as drought spread across many grain-producing regions, including the U.S. Since that time, feed costs have normalized and global economies have rebounded – and animal protein demand has followed suit. The result: a period of climbing U.S. consumption of animal protein, including chicken, and a prolonged run of elevated profitability for the chicken industry.
The five-year period prior and including 2012 is in many ways a dark ages for the U.S. chicken industry and animal protein in the U.S. in general. From 2008 through 2012 more than a dozen chicken companies changed hands as industry profitability tested historic lows on more than one occasion. Factors driving this challenging period included:
- Passage of the Renewable Fuel Standard in the U.S. The country developed a large ethanol industry consuming approximately one-third of U.S. corn production.
- The entrance of China onto the global stage for imports of both feed grains and animal protein.
The global supply of feed stocks has rebounded now that demand growth for ethanol and demand from China has slowed dramatically. With that change, feed costs have not only fallen dramatically but have been far less volatile. This has allowed animal protein producers to plan and develop supply chains far more effectively. With capacity having subsequently grown across the poultry sector, fears are now growing of a looming correction.
Read more in Will Sawyer’s report, “U.S. Poultry Outlook: This Time Things Are Different”.