Source: Michael Fielding, MEATINGPLACE, 12/1/14

An improved demand outlook bodes well for chicken companies — despite the prospect of meaningfully higher 2015 chicken and pork production, according to BB&T Capital Markets analyst Heather Jones.

“Interestingly, our conversations with industry contacts suggest very strong retail movement of late, reflecting active features at attractive price points, and that retailers are scrambling to secure 2015 supply in anticipation of more aggressive featuring and off-take,” Jones wrote in a note to investors. “Further, on average, food service customers are demonstrating a greater willingness to sign fixed-price contracts.”

The USDA has projected a 3 percent and 4.4 percent increase for chicken and pork production, respectively, in 2015, but Jones wrote that chicken likely will increase by more than 4 percent, while pork may rise nearly 5 percent. Chicken demand this year has benefited from exceptionally tight beef and pork supplies, and pricing has been bolstered by tight chicken supplies.

Although meaningfully higher supply typically engender significant price deterioration, several factors led Jones to believe that will not play out across the entire chicken complex next year. “We do anticipate lower pricing, on average, than in 2014, but we believe that in certain sub-segments, the decline will not be as significant as that of feed costs, resulting in improved margins,” she wrote.

Industry responds to changing demands
The chicken industry has done a better job of responding to rapidly changing consumer demands, such as organic, ABF, and convenience, Jones wrote. “This partially reflects the fact that the shorter life cycle and more efficient feed conversion of a chicken affords greater flexibility and responsiveness than would be required in hog and cattle husbandry, but there also seems to be a more consumer-centric and responsive mindset than in the pork and beef industries,” she wrote.

On the food service side, demand for chicken also is expected to be stronger in 2015 as operators likely will feature it more aggressively in the face of even tighter ground beef supplies.

However, the more commodity-like big bird sub-segment with heavy exposure to food service likely will see profit-per-pound deteriorate in 2015. Supply gains for that group are expected to be greater than for the overall industry due to new higher-yielding breeds and a continued shift in production to big birds.

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