Cheaper corn pushes chicken production higher

A three-year low price in corn this week is helping to fuel the competitive fires among Tyson Foods Inc. and other major chicken processors as they seek to gain marketshare by pushing poultry supplies higher.

The U.S. corn harvest is expected to hit 14 billion bushels, some 30% larger than last year. About 80% of that crop has already been harvested as of last week which has taken December prices south to $4.25 a bushel, down roughly 40% from a year ago.

Analysts worry that chicken processors won’t be able to show the necessary restraint to keep supplies in check, as their profit margins are widening with cheaper corn and soybean meal.

Egg sets, an indication of future meat supply, have risen about 2% this year, but the temperate weather throughout the summer led to increased bird weights, which is yielding more pounds of poultry meat. Ready-to-cook poultry weights rose 5% in September and have averaged between 4% and 5% gains each month this year, compared to 2012, according to the U.S. Department of Agriculture.

Chicken companies are making about a nickel per pound processed, a big improvement over the losses equal to that much a year ago. But as the profits per pound rise, so does the temptation among processors to heat up their production. This is typically the time of year when seasonal demand wanes and companies cut back on egg sets. Data show this is not happening yet.

The pullback is generally needed to prop up chicken meat prices that traditionally slump between October and the early months of the following year when there is more product than there is demand.

Chicken prices are already headed lower for food service customers because of surplus supplies already in the pipeline. The American Restaurant Association estimates food service operators will pay 5% to 10% less for chicken this next year.

Excess poultry meat, primarily leg quarters, had been building up in cold storage throughout the summer, when the USDA announced in August it would purchase nearly 80 million pounds of chicken to help with excess inventory levels. The following month USDA announced it had awarded four poultry companies a total of $49.8 million in chicken purchases.

Tyson Foods was the big winner selling some 59 million pounds valued at $32.98 million to the federal government. O.K. Foods received $4.03 million for 6.840 million pounds it sold, while Pilgrim’s Pride and Peco Foods also sold chicken netting $6.43 million and $1.43 million, respectively.

Donnie Smith, CEO of Tyson Foods, has repeatedly said the company will not contribute to excess supplies erring on the side caution and buying the parts it needs in the open market to satisfy orders when its own production comes up short. Likewise, Pilgrim’s has said it is also practicing restraint, but the industrywide numbers tell a different story.

Total frozen poultry supplies on Sept. 30, following the USDA purchase, were still 2% higher than a year ago.

Georgia Dock boneless, skinless breast meat prices averaged $1.82 last week, up 14% from a year ago, but falling 13.5% from a summer high price of $2.10 per pound. Leg quarter prices at 50 cents a pound are down 6.5% from a year. Prices have fallen from a 56-cent high set in April as surplus inventory continues to build up in cold storage.

There is also 5% more beef in the freezer, while pork belly stocks are up 45% from a year ago.

Consumers should also see the benefit from these lower prices as supplies continue to build in the coming months.

On the flip side, food deflationary pressures continue to problematic for grocery retailers like Wal-Mart Stores Inc. trying to grow topline revenue.