Source:  MEATINGPLACE.COM, 10/22/10

Excess supply, pressure on prices and onerous feed costs will force chicken producers to cut production to avoid becoming unprofitable, according to Deutsche Bank.

Producers on average will remain profitable through early December, when high corn costs will begin to be felt, Deutsche Bank analyst Christina McGlone said.

“The bottom third to half of the industry will likely lose money beginning in December. Hence, chicken production cuts, first in the form of weight reductions, will have to happen,” McGlone wrote in a report to clients.

As higher feed costs squeeze profits, a pullback in weights will be felt in the first quarter of 2011, she predicted.

After taking a tumble, breast meat prices have stabilized only temporarily as Russia takes shipments until November 1, and leg quarter prices are on the decline, with Russia pressing some suppliers for downward revisions to earlier pricing, she said.

Weekly slaughter data show a 3 percent to 4 percent yearly increase in recent weeks, while egg sets are running 5 percent to 6 percent higher since Labor Day, the analyst noted.

The beef and pork markets look fairly tight into 2011, but the supply pipeline in chicken will also weigh on the pork market, whose profitability “will get worse before it gets better,” McGlone said.

Ethanol prices have followed corn higher, but the gap between ethanol and gasoline has narrowed, and the incentive to blend has been restored somewhat, Deutsche Bank analysts said.

The American Coalition of Ethanol, Growth Energy, the National Corn Growers Association and the Renewable Fuels Association have tentatively agreed to a five-year alternative proposal to the ethanol tax incentive, according to the report.

In the restaurant sector, beef, pork and chicken represent about 35 percent of the cost of goods sold for the average restaurant. Deutsche Bank analysts said they remained concerned about higher prices for beef, especially steaks, and pork given tight markets. Chicken production continues to grow because operators are skeptical about the sustainability of corn and soybean prices, they added.

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