Tyson execs expect chicken demand to boost margins in fiscal 2015

The term “eat more chicken” is likely to become more than just a Chick-fil-A slogan, as the poultry industry hopes to fill the protein gap created by shrinking beef supplies and limited growth in chicken production heading into 2015.

Executives with Tyson Foods said Wednesday (Dec. 11) at an investor conference in New York that the chicken industry is nearly maxed out in terms of production capacity heading into 2015 while at the same time that there is an expected 3% uptick in demand. Those factors could boost chicken prices and margins for Tyson Foods and other poultry processors.

Donnie King, president of Tyson Foods North American operations, said production sits at roughly 94% capacity — which is full. To meet the anticipated demand in early 2015 King said 2,000 more chicken houses would have to built now, which he said is not a feasible supply solution.

Bernie Adcock, head of supply chain operations for Tyson Foods, said there is a maximum 2.5% gain possible in poultry production slated for the first half of 2015, which is constrained by breeding stock age in small birds – one of the fastest growing and most profitable of segments within the chicken business.

“We are going to need more chicken meat. You can’t get more out of the current capacity and it takes time to build more chicken houses,” King said.

Analysts aren’t totally convinced the supply will be short because historically the poultry industry ramps up production in times of higher profits which eventually creates a supply glut and results in falling prices and profits.

Poultry execs said this time is different because of the “halo-effect” in the chicken segment resulting from a drastically shrinking beef supply. Tyson Foods CEO Donnie Smith said there is a fundamental shift by the consumer with respect to choosing chicken instead of beef.

Rob Moskow, analyst with Credit Suisse, is one of those market watchers who has doubts about Tyson’s analysis.

“We continue to harbor concerns that Tyson's competitors are going to do whatever they can to take advantage of the favorable environment by increasing production as they have in just about every chicken cycle historically, “ Moskow noted. “By our math, the supply growth could easily exceed this pace of demand if egg set growth stays at 3% and yield improvements continue to add extra weight to chickens.”

SMALL BIRD CONSTRAINTS
Tyson management said its foodservice customers want and need to be able to promote chicken in 2015, something they could not do in 2014 because of a shortage in small bird capacity stemming from older breeder stock and less favorable hatching results. The small bird business predominantly sends products to foodservice for rotisserie chicken or fried chicken products.

Noel White, the head of Tyson Foods chicken business, said foodservice contracting began earlier and concluded much earlier this year as customers were trying to lock down supplies for 2015.

“It wasn’t about the price as much as it was about securing their supply given the tighter supply in small bird production,” White said.

He said Tyson’s chicken business includes four distinct categories:
• Tray pack, fresh chicken for retail;
• Big bird, used for bone out products;
• Small bird, used in foodservice for rotisserie or to be cut for fried chicken; and
• Retail, fully cooked or value added products.

White said supplies will be short of demand in small bird, and growing more large birds doesn’t fix that.

Tyson competitor Pilgrim’s Pride also recently shared similar sentiment about the industry’s supply and demand issues. In a recent earnings call, Pilgrim’s Pride CEO Bill Lovette downplayed concerns that the friendly business climate for chicken would lead the industry to flood the market and create a supply glut and depress poultry prices.

While the industry looks set to increase production of large birds, Lovette said fewer smaller chickens may be raised, and many eggs are being sent to Mexico to be hatched. He also expects U.S. poultry exports to rise 2% next year.

“We have seen both food service and retail operators wanting more chicken across the whole spectrum of products we supply, both on the large bird for deboning segment, and especially on the small bird segment that goes either into the Q.S.R. (quick service restaurant) fried chicken restaurant industry or the supermarket deli,” Lovette said. “Supplies remain very tight. We don’t see that changing in 2015, even though there could be up to a 3% increase, and we think that is back half loaded.”

Smith told investors at Thursday’s conference that it looks like the increase in broiler meat on the market would appear at about mid-summer around July 4. 

“Before that, it's just physically impossible to get a whole lot more supply on this market,” Smith said.

BUY VERSUS GROW
Tyson execs reiterated that the company will remain one bird short of demand with its buy-versus-grow strategy in 2015. 

“Make no mistake we can grow birds as good or better than anyone else, but that isn’t our aim. We are focused on selling more valued-added chicken and we won’t end up with excess raw materials in the process,” King said.

Adcock asked analysts not to get caught up in the transactional purchases, but to think of it as an overall strategy that Tyson is using to match the supply with the demand it sees from its customers.

White said in the fourth quarter of 2014, Tyson purchased 100 loads of chicken parts per week which is equal to roughly 4 million pounds. He said the company buys parts on the commodity market to fill certain value-added orders which can be sold at a higher margin.

“It a spread business much like our beef and pork units … Bigger demand is going to mean we likely buy more chicken,” King said.

Tyson Foods is adding additional processing capacity for its tray pack fresh retail business, which is one of the uses for the chicken it buys on the open market. King said the tray pack fresh business is one of the fastest growing and most profitable segments within its chicken business.

Tyson management held firm to the 2015 chicken margin guidance of 10% or better because of relative grain price certainty, the benefits from capital investments made in the last few years and the ongoing impact on chicken demand from rising beef prices. The company expects a similar environment in 2016 as chicken consumption increases another 3%.