Source:  Lisa M. Keefe, MEATINGPLACE.COM, 12/7/09

The poultry industry is in for a "mediocre" 2010, as chicken head counts stay flat but weights rise, and demand increases only slightly, says Farha Aslam, protein analyst for Stephens Inc., in a note to investors.

Profitability in the industry will not be "exceedingly good unless demand picks up or feed costs drop as there is significant unused capacity and producers are hungry to expand production," she writes.

Reporting on a recent tour of poultry processors, Aslam expects supply to be up by 2 percent to 3 percent next year, but demand will be up only "slightly" as pork and other proteins run into trouble with their export markets and woo consumers domestically.

Big bird possibilities

Companies seeking greater yield will take advantage of the fact that birds now can be raised to 7-to-8 pounds a piece with the same feed-to-meat conversion rate as a small bird. Tyson and Sanderson both are adding to their big-bird processing capacity. Tyson recently converted two complexes to big-bird operations "and is in the process of converting a third, and is likely to continue to covert a complex to 7.0+ pound birds every six months," Aslam writes.

It's easier to adjust weights in order to optimize profitability in processing than it is to change head count, she notes.

Pricing, Aslam wrote, is expected to be flat: Wings will continue to fetch above-normal prices, now 40 percent above prices a year ago and 44.6 percent above the five-year average. Leg quarters still will do well due to exports. Meanwhile, breast meat will see soft demand from the foodservice sector. Food costs will be "unpredictable."

Hot wings

Wings, in fact, are benefiting from the trend among consumers of dining on appetizers alone, rather than a full-service meal. Prices in that sector are expected to remain strong through the Super Bowl. However, success in spurring demand for "boneless" wings, which are made of breast meat, could change the dynamic and boost prices for breast meat, which now is priced 17 percent below that for wings.

Prices for breast meat took a beating during the annual restaurant contracting season, Aslam reports, during which major chains generally lock in prices for the next year. The decline in foodservice sales so far has created 10 percent to 15 percent overcapacity in the poultry industry, she notes, and individual companies, such as Pilgrim's Pride and Tyson, are aggressively seeking market share, which is likely to keep a lid on profitability overall.

Tyson

Aslam increased her fiscal 2010 earnings projections for Tyson, based on "significant improvements" in operations. She now expects Tyson to earn $1 per share in fiscal 2010, ending Sept. 30, up from her previous projection of 95 cents per share. She expects Tyson to turn in a better first quarter performance, ending Dec. 31, with earnings per share of 25 cents, up from her previous estimate of 14 cents per share for the period.

She points to improving small-bird margins and better leg quarter sales as the drivers behind improved earnings. Longer-term, Aslam notes that Tyson expected to invest $50 million to $60 million in capital expenditures to improve capacity, increase efficiency and lower SG&A.

Sanderson Farms

Laurel, Miss.-based Sanderson Farms, with its low costs and high return on invested capital, may be challenged somewhat in 2010 as lenders put more restrictions on financing and the company faces stiffer competition, particularly from Tyson.