Russian Problems Threaten Exports

Russia buys more chicken from U.S. poultry companies than any other country in the world, so producers are watching carefully the ongoing political and economic turmoil there.

The Russians bought some 933,000 metric tons of chicken valued at $729 million from U.S. producers in 1997, according to the U.S.A. Poultry and Egg Export Council. Sales seemed destined to top that mark this year with 473,000 metric tons valued at $349 million sold in just the first six months.

Most of those exports are the dark meat leg-quarters consisting of the chicken’s leg and thigh. In the trade, they’re often called “Bush legs” because the exports began during George Bush’s administration under a Food for Progress program.

Sources contacted for this story say it’s too soon to predict what effect will result from the devaluation of the ruble and the chaos in the Russian government. Demand tends to be highest during the coldest period of the year, which, in Russia, begins in October.

Still, analysts say companies like Tyson Foods Inc. are unlikely to be seriously affected, even if the Russian situation deteriorates further.

In fact, the industry in general and Tyson in particular are facing good times, analysts say.

This is despite Tyson’s Aug. 31 announcement that it anticipates a fourth-quarter loss as the result of a $196 million restructuring charge. The pretax writedown includes a $30 million increase in reserves to cover business expenses in Russia and Asia.

John Bierbusse, an analyst who follows Tyson for A.G. Edwards & Sons Inc. in St. Louis, says the Russian situation draws attention away from other more positive and more important factors.

“Russia does, I think, distract a bit from very, very positive fundamentals,” he says. “Grain costs are very, very cheap. We have the largest soybean crop ever and the second-largest corn crop” is expected this fall.

Numbers supplied by the National Broiler Council differed slightly from those supplied by USAPEEC but the two industry associations agreed that exports rose in 1997 while the dollar value of those sales declined.

Specifically, according to the National Broiler Council, U.S. poultry companies exported some 926,000 metric tons in 1997 compared to 857,000 tons the prior year. The value of those exports fell from $829 million to $716 million, primarily because of an abundance of meats, including pork and beef, that depressed prices.

That has changed, Bierbusse says.t

“Supply growth has been very, very moderate this year, and that has stimulated excellent selling prices for chicken.”

In some cases, he adds, prices are the best the industry has seen since 1989.

“So profitability is very strong right now,” Bierbusse says. “I think [the industry] can withstand some downward movement in leg-quarter prices.”t

Shane Glenn follows Tyson Foods for Stephens Inc. in Little Rock.

He agrees that Russian purchases may not greatly affect poultry producers’ performance.

“I think it’s not as significant as some people make it out to be,” Glenn says. “Although poultry exports are becoming more significant, the industry is doing a lot to expand into other markets beyond the major markets of Asia and the former Soviet Union, part of which is Russia.

“When you look at the fact that most of these markets are dark-meat markets, the contribution toward operating income is not as significant as it would be from some of the other value-added products that Tyson sells in the United States,” Glenn continues.

Glenn also spoke about the low price of grain, which is used as chicken feed.

“These are some of the lowest corn prices we’ve seen in years.”

December corn contracts were trading at around $2 a bushel in early September — a 52-week low — while the cash market was even lower at between $1.70 and $1.80 a bushel. The 52-week high for December contracts was $3 a bushel.

Still, the industry watches Russia.

Bill Roenigk, vice president of the National Broiler Council, described potential problems as of “serious concern” to the broiler industry.

“But,” he adds, “it’s important to point out it is a financial and political problem, not a market problem.”

Roenigk says demand for U.S.produced leg-quarters remains high.

“The Russian consumer has developed a preference for the meatiness and flavor of the U.S. product, and they also have come to understand it’s the best value they can get in the way of an animal protein product.”

Toby Moore is a spokesman for USAPEEC, the Atlanta-based trade association that promotes the export of U.S. eggs and poultry.

Moore says that, as of the last week in August, USAPEEC members were reporting little disruption in trade with Russia. However, he adds, that could change on a daily basis, Moore says.

Also, shipments from ports like Gulfport, Miss., which many Arkansas, Missouri, Texas and Mississippi producers use, can take a month to arrive in Russia, Moore says. Late August shipments are likely to arrive in October.

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Importer’s risk

The National Broiler Council’s Roenigk says that most shipments to Russia are, in effect, cash on delivery.

“The [poultry] companies have been very careful. They’ve established ongoing relationships with importers there,” he says. “Once the product is delivered, there is immediate payment.”

The result, he says, is little financial exposure to the seller.

But one source familiar with the poultry export business says that doesn’t ensure the importer can cover payments when the value of the ruble tumbles dramatically as it has in recent weeks.

Already, he says, several ships loaded with frozen chicken reportedly were docked in St. Petersburg, their intended customers unable to pay for delivery.

Although poultry industry sources say the Russian demand for their product is strong, this is not the first time the market has proven more risky than other areas.

In 1996, Russia stunned the industry when it announced a boycott of American poultry because of health concerns. Although industry officials declared the claims unfounded and politically motivated, the threat of a boycott coupled with sharply rising feed prices caused several companies to curtail production. Tyson Foods, Hudson Foods Inc., and Simmons Foods Inc. all announced production cutbacks of 7 percent to 8 percent. Hudson Foods has since been purchased by Tyson, but James T. “Red” Hudson continues a small business with Poland.

Hudson & Associates doesn’t sell chicken to Russia, but the falling ruble has affected economies of neighboring countries. As a result, Hudson says sales are down by 65 percent through his operation in Poland.

“The Russian situation definitely affects our export business,” says Hudson. “Our sales are way down. In fact, some days over there it’s almost nonexistent. People can’t get dollars. We only sell for dollars. Most of our stuff goes through Poland to other countries.

“It’s just one of those down times. I’m not worried about hanging onto [the Poland operation]. Sales just aren’t robust like they were before.”

Hudson says he bought the Poland operation back from Tyson Foods after Tyson bought Hudson Foods last January.

“I bought it back just for something to do,” says Hudson, “just to kind of stay busy.”

Hudson says sales through the Poland operation should be about $75 million this year. That compares to sales of about $1.7 billion annually for Hudson Foods before the company was crippled a year ago by an outbreak of E. coli bacteria.

The analysts say it’s risky to engage in exports, but that’s a necessary part of doing business.

“I think it’s incumbent on market leaders to lead markets,” says Bierbusse of A.G. Edwards. Tyson, as a market leader, must develop new outlets for its product.

He points out that, overall, international sales are a small part of Tyson’s business

“I think domestic fundamentals are excellent. To get obsessed about … the pricing of, in essence, a by-product [leg-quarters] seems a little bit odd,” Bierbusse says.

Far more important, he says, is ensuring that the Russian people are fed this winter.