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Times are tough for the chicken business the Wall Street Journal reports.
Pilgrim’s Pride will shut down another of the company’s
chicken-processing plants in an effort to survive a vicious price squeeze in
the poultry business. “Our industry’s business model is not
sustainable at these [price] levels,” said Pilgrim’s Pride Chief
Executive Bill Lovette on a conference call. The
company will have 29 bird-processing plants after the Dallas plant closes.
However, eight of the 29 facilities have already been idled.
Pork and beef producers are weathering the high grain price storm because
of strong export markets. But chicken demand is more dependent on U.S.
consumers, 20% or so that are unemployed or under employed. Ian Berry and
Marshall Eckblad write,
The fact that chicken prices have continued to struggle is due to
stubbornly high supplies and is a sign that the domestic market is saturated,
said Russ Whitman, vice president for Urner Barry,
which tracks the commodities sector. Boneless, skinless breast-meat prices
are down 17% over the past year.
So while corn prices have doubled in the past few month,
Pilgram’s hasn’t been able to pass on
the input cost increase. “The ultimate source of the determination of
prices is the value judgements of the
consumers,” Ludwig von Mises wrote in Human
Action.
Serving to pump up corn prices is a mandate from Congress to subsidize
the production of corn-based ethanol. Now a third of the country’s corn
crop goes to make fuel, up from 7% in 2001. “The dangerous fact is
while government is hampered in endeavors to make a commodity cheaper by
intervention,” wrote Mises in Omnipotent Government,
“it certainly has the power to make it more expensive.”
Companies like Pilgrim’s Pride attempt to lessen input cost risk
by speculating in futures markets. However, in Pilgrim’s case these
bets didn’t work out.
Pilgrim’s also indicated it made wrong-way bets on the price of
corn, reporting $5.7 million in net mark-to-market losses in its derivatives
portfolio as corn prices dropped sharply in late June after hitting a record
high of nearly $8 a bushel early in that month.
The corn price has backed off to $6.68 a bushel as I write. Though not
close to its record high, corn has more than tripled since 2005 when it
fetched less than $2 a bushel. During the same time the price of whole
chickens has increased just north of 11% according to the Bureau of Labor
Statistics.
Pilgram’s Pride filed
for bankruptcy in 2008 and continues to struggle as does
chicken processor Townsend, which announced
last week was closing all of its operations by November. Nearly 1,000 workers
will be sacked from two plants in North Carolina and contracts with 200
chicken farms will be terminated. Ukrainian billionaire Oleg Bakhmatyuk, “just decided to shut it down and take
his losses and go on,” said David Purtle, a
former Tyson Foods executive who was hired to be Omtron’s
CEO. “He just didn’t like the environment in this country and the
lack of discipline that the poultry industry had.”
The assets of Allen Family Foods, a 100-year-old
Delaware commercial broiler chicken producer, are
being purchased by Korea’s largest poultry producer. Allen filed
for bankruptcy earlier this year citing rising feed prices, operational
mistakes, and a cut in its credit line. Charles “Chick” Allen,
whose grandfather founded the company 92 years ago, told The (Wilmington)
News Journal, “Keeping the operations open, people employed and
growers’ houses full of chickens have been ongoing major concerns to the
family throughout this difficult process.”
“When it starts getting above $5 a bushel with
corn [chicken processors] really can’t make money,” said Dan
Campeau, a poultry agent with the N.C. Cooperative Extension Service.
“They’re just treading water.” Campeau goes on to say,
“If we have another year or two like this it’s going to drive
everybody out of business and most of our business is probably going to go
south to Mexico or South America.”
And as if the bird business wasn’t tough
enough, U.S. poultry plants have repeatedly been raided by
Immigration and Customs Enforcement (ICE) agents during recent years.
All this bad news must mean the days of cheap chicken will be over
soon.
Douglas French
Mises.org
Douglas French is president
of the Mises Institute and author of Early Speculative Bubbles &
Increases in the Money Supply. See his tribute to Murray Rothbard.
Article originally published
on www.Mises.org. By authorization of the
author
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