Chicken processors see price margin volatility with COVID-19 resurgence

Tyson Foods and other top chicken processors have been hit hard by the COVID-19 pandemic with positive cases reducing plant production while consumer demand and prices continue to take a roller coaster ride.

Stephens Inc. analyst Ben Bienvenu noted to investors demand volatility is expected to continue until more clarity about sustained production cuts are known. Year-to-date, the Stephens chicken margin averaged 8 cents per pound, half of the margin a year ago. Bienvenu noted the U.S. chicken margin was $0.14 per pound, flat vs. last week and down 2 cents versus last year. Chicken prices are down 5% year over year while and feed prices are down 9% from 2019.

Kenneth Zaslow of BMO Capital Markets said chicken margins sank to record lows in March and April before staging a rebound in May due to accelerated production cuts and lower competing protein supplies. Stabilizing foodservice (restaurant) demand and solid export volumes also lent support.

He said margins retreated again in June because of labor constraints, higher weights and more tempered foodservice demand. Processors who could shift production away from foodservice to retail grocery have done so in the past three months. But Zaslow said a decline in slaughter mix of small birds has created a surge in bird weights, putting pressure on chicken cutout prices.

Zaslow raised his chicken production outlook or this year to “flat” from the 1% to 3% decline he previously predicted. He also said the industry will launch additional production cuts if margins do not begin to recover through the summer. The situation will not be helped by foodservice demand recently retreating thanks to reopening delays in large states like California, Florida and Texas as COVID-19 continues to spread, he said.

In a recent investor call with Urner Barry, a business publication focused on food commodity markets, analysts reiterated a negative sentiment regarding chicken fundamentals. Boneless breast meat prices have softened in recent weeks and production cuts have started to take place to support pricing in the coming weeks.

For diversified protein companies like Tyson Foods, JBS and Cargill, beef margins remain fat at about $250 per head last week, That said, production disruptions and lower exports limit the fully realized margins for most packers, Zaslow noted. Tyson also produces pork, which has abundant supplies and healthy margins of $60 per head, Zaslow noted, but said growing COVID-19 costs and plant closures have hurt realized margins.

Shares of Tyson Foods (NYSE: TSN) closed Monday (July 20) at $60.16, down 66 cents. For the past 52 weeks, the shares have traded between $42.57 and $94.24. Tyson shares are down 30% year-to-date.