Source: MEATINGPLACE, 12/6/13

Poultry supply growth will remain constrained through much of 2014, bolstering industry profits, but the outlook becomes murky heading into 2015 when supply is likely to increase, according to one Wall Street analyst.

Some chicken producers expect profits to be weak in 2015 and are signing multi-year contracts now to avoid having to negotiate next fall, Stephens Inc. analyst Farha Aslam said in a research report.

Production is expected to increase by 2 to 4 percent in 2014, propelled by increased bird weights and a higher number of eggs. In the first half of the year, however, production will be in line with 2013 levels due to a constrained pullet supply and reduced hatchability, Aslam said.

Chicken producers in some cases have held pullets past the prime age of 58 weeks to an average of 65-66 weeks, and these older birds produce eggs that have lower hatch rates and less healthy chicks, she said.
New profit strategies

With volume growth generally limited, companies are developing more sophisticated strategies to generate profits, Aslam wrote.

“Rather than annual fixed price contract that are negotiated every fall, companies are partnering with customers and creating contracts that can be multi-year in duration. Contracts are now being negotiated all year long and employ a wide variety of pricing methodologies,” the analyst said.

Companies are also developing sales programs that maximize the value of the whole bird rather than focusing solely on boneless skinless breast meat to drive profits, she added.

Pricing
Aslam expects chicken pricing to decline by 5-6 percent in 2014 as continued demand in retail and food service partially offsets increased production levels. She cautioned, however, that Pilgrim’s Pride is forecasting prices to be down 10 percent in 2014 from 2013.

The analyst raised her stock price target on Tyson Foods, her top pick in the protein industry, to $40 from $34, near where the shares are currently trading. The company has been focused on cost reductions and restructuring its contracts to lower commodity risk, she said.

Aslam has an equal-weight rating on Sanderson Farms. Sanderson’s growth plan focuses on increased production via two new facilities that would boost the company’s capacity by 26-27 percent in terms of birds per week, she said. The company is building a big bird deboning plant near Palestine, Texas, that could begin production in January 2015 and is also looking to open another such plant in North Carolina.

She also rates Pilgrim’s Pride at equal-weight, noting the company’s U.S. division has contracts that are performing very well in the current environment.

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