Source:  MEATINGPLACE, 5/26/11

Soft breast meat prices heading into the Memorial Day start of grilling season have more poultry market watchers predicting production cuts cannot be far behind.

Weak demand for breast meat, surging commodity prices and a larger share of big birds being slaughtered quash any hope of a market recovery and point to widening industry losses after summer, said BMO Capital Markets analyst Kenneth Zaslow.

“The chicken industry faces an untenable operating environment, which likely will lead to production cuts in (the second half of 2011), and the recovery of chicken margins in 2012,” Zaslow wrote in a note to clients.
Two rounds of production cuts are likely needed over the next six months to restore chicken margins, Zaslow said.

Egg sets dropped for a third straight week, and the year-over-year declines are steepening, said Deutsche Bank analyst Christina McGlone.

Tyson in good shape
While soft chicken prices and expensive corn will pressure the industry to cut production, producers other than Tyson Foods will drive the cuts, predicted McGlone, who is maintaining a “buy” rating on the company.

“Cost cuts, focus on basics, mix improvements and prudent hedging has put Tyson near the top of the industry. As a result, the rest of the industry is forced to take action in terms of cuts, vs. the previous strategy of relying on the industry leader to cut,” she said.

Zaslow reduced his 2011 earnings expectations for Pilgrim’s Pride while keeping his outlook for Tyson intact, also impressed with Tyson’s operational improvements and balance sheet deleveraging.
Producers may begin to reduce bird weights after Memorial Day through earlier slaughter or increased Saturday kills, Zaslow said.

Dark meat a bright spot
Leg prices are the exception to a bleak pricing outlook, Zaslow said. While breast prices are at least 15 cents below quoted prices of $1.30, leg prices are quoted at 48 cents and some producers are booking legs for 55 cents, he said.

Leg prices have been rising every month since January due, lifted by higher domestic demand, Zaslow noted, and Tyson recently indicated that dark meat prices are stronger than the company expected. “The improvement in domestic dark meat demand reflects the low price of dark meat relative to competing proteins, the growth of concept chains and increased inclusion at buffets,” Zaslow said.

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