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As chicken rebound falters, more production cuts needed: analyst
Story Date: 2/8/2012
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Source: MEATINGPLACE, 2/7/12
The recovery in chicken operating margins has stalled, and further production cuts will likely be needed to regain momentum if industry fundamentals do not improve considerably in the coming weeks.
That’s the conclusion of BB&T Capital Markets analyst Heather Jones, who cites deteriorating demand, a fresh spike in feed costs and weak boneless/skinless breast prices as factors slowing margin improvement for processors.
Feed costs have risen significantly since mid-December, while boneless/skinless prices are moving backwards at a time when pricing typically strengthens, Jones said.
The average big bird producer is earning 3 to 4 cents per pound, two cents below what Jones would have expected by now, she said, given the substantial production cuts that have already been made. Production declined 10.1 percent in December and 7 percent in November.
If processing margins don’t reach the 4- to 5-cent range, another round of cuts will be forthcoming, she predicted. “Barring a jump in demand … there should be little debate regarding whether another round is required,” Jones said in a note to clients.
She noted that beef margins have plunged, suggesting packers will likely cut kills and may shutter some capacity as well. That means Tyson Foods and Pilgrim’s Pride have incentive to help the chicken market move higher even after instituting big production cuts already.
Lack of demand for chicken is “counter-intuitive” because high pork and beef prices should translate to greater chicken use, Jones said, and restaurant operators have indicated customer traffic trends are picking up.
She speculated that smaller portion sizes at some food service operators may be playing a role in dampening demand. “We also understand that McDonald’s popcorn chicken promotion has not been a resounding success,” Jones said.
For more stories, go to http://www.meatingplace.com/.
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