LDN - Business

U.S. chicken processor profits fatten on cheap feed

[July 24, 2017] By Tom Polansek and Jo Winterbottom

CHICAGO (Reuters) - U.S. meat producers are earning some of the highest profit margins in more than a decade, a bright spot for investors in agriculture, where grain farmers and trading companies are struggling to make money after years of massive oversupply.

Profits have soared and share prices are close to record highs for chicken processors such as Sanderson Farms and Pilgrim's Pride. With another bumper grain harvest expected this year, prices for feed should stay low. That, combined with robust demand for protein, could keep profits strong well into 2018.

Cheap grains are also boosting profits for companies that fatten up cattle before slaughter and even for the big meat processors, such as Cargill, which buy the animals but not the grain to feed them.

"Margins are excellent," Joe Sanderson, chief executive officer of Sanderson Farms, told Reuters last month. "Grain prices are similar to a year ago, and prices for our products are higher than they were a year ago."

It has been nearly 10 years since the corn and soybeans used in animal feed were so cheap for so long, with prices languishing under a glut of grain from four bumper harvests.

At the same time, U.S. per capita consumption of chicken is expected to hit a record high this year, according to National Chicken Council annual data that runs from 1965. Consumption of red meat is forecast to be the highest since 2009.

Consumers’ increasing appetite for protein and improvements in the U.S. economy have driven up meat consumption. Chicken sales have benefited because it is cheaper and considered healthier than beef and pork.

Soaring demand means retail prices have not fallen substantially, even though feed prices are low. Retail chicken prices in 2016 were just 11 cents off the 2014 high of $1.53 per pound. Prices hit highs for beef in 2015 and for pork in 2014, and they remain close to those levels.

But as beef prices have come down, consumers have bought more, according to Cargill Inc, one of the world’s largest suppliers of ground beef. The privately held company swung to an operating profit in the quarter ended May 31 from a loss a year ago on the back of strong demand for poultry and beef.

"If you have low grain prices for a sustained period of time, ultimately that translates into lower beef prices," Chief Financial Officer Marcel Smits told Reuters.

High profit margins in meat production stand in stark contrast to the fortunes of crop producers and grain merchants such as Archer Daniels Midland Co and Bunge Ltd. These companies are struggling to profit from international grain trading due to the global glut.

CHICKEN CHAMPIONS

The clearest winners among meat producers are poultry firms, which get a direct benefit from cheap feed because they own and feed the birds that they slaughter.

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Steak is pictured in New York March 11, 2015. REUTERS/Lucas Jackson

Sanderson Farms, the third-largest U.S. poultry producer, is so confident grain prices will stay low that it is buying small amounts of feed to cover short-term needs, Chief Financial Officer Mike Cockrell told Reuters. Last year, in contrast, the company booked soybeans in advance to lock in prices that were lower than they are now.

"Chicken margins are blowing out," said Kelly Wiesbrock, portfolio manager at Harvest Capital Strategies, which owns about 255,000 shares of Pilgrim's Pride, the second-largest U.S. chicken producer, and 100,000 shares in Tyson Foods Inc, the biggest U.S. meat processor.

Sanderson Farms has turned in net profit margins of over 6 percent for the last three years, a feat it last achieved in 2003-05. Pilgrim's Pride had a record streak of net profit margins of 5.5 percent and above in the last four years.

Dividends have been similarly bountiful. Sanderson Farms made a record payout last year while Pilgrim's Pride, in which Brazil's JBS has a 78.5 percent stake, splashed out with special dividends totaling $8.52 per share in 2015 and 2016.

FAT PROFITS

In beef production, the privately held companies that fatten up cattle on feedlots, are seeing record profits for 2017, according to Jim Robb, an analyst at the Livestock Marketing Information Center.

Gary Vetter, a farmer who raises cattle and corn in Iowa, put it this way: corn growers are "subsidizing the feedlot."

Smithfield Foods, the world's largest pork producer, said feed makes up over 65 percent of the cost of producing hogs and that the company's ability to source high-quality grain at low cost gives it a competitive advantage.

It buys grain for farmers who raise hogs for the company under production contracts.

"Low grain prices are good for the pork industry," Smithfield spokeswoman Heather Houston said in an emailed statement.

Smithfield, bought by China's WH Group Ltd in 2013, no longer makes financial information available to the public.

John Prestage, whose family owns Prestage Farms which sells hogs to Smithfield and other processors, said those who pay for the feed benefit most from cheap grain prices.

"In our case, it is us," he said.

(Additional reporting by Michael Hirtzer, Theopolis Waters and Karl Plume in Chicago; Editing by Simon Webb and David Gregorio)

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