November 2011 Articles

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Transitions in the Broiler Chicken Industry

Transitions in the Broiler Chicken Industry Ross Pruitt, Department of Agricultural Economics and Agribusiness LSU Ag Center Last week saw the third U.S. vertically integrated broiler chicken firm declare bankruptcy in 2011. Cagle’s of Georgia joined Allen Family Foods and Townsends Incorporated in filing for Chapter 11 bankruptcy protection which would allow the company to reorganize its business operations. Townsends would eventually file for Chapter 7 bankruptcy liquidation. As if the continued lackluster demand and higher costs of gain were not problematic enough for the industry, the recent ruling against Pilgrim’s Pride has put the industry on further notice about the way it discusses reducing production to aid in returning the firm (and its contract growers) to profitability. The October 5th edition of the CME’s Daily Livestock Report has a good recap on the implications of the Pilgrim’s Pride ruling for the broiler chicken industry. To date, Cagle’s has not disclosed any potential idling of plants in light of the court ruling on the Pilgrim’s Pride case. Additional transitions are evident in today’s news that O.K. Foods is being acquired by Industrias Bachoco, a Mexican poultry giant. Higher cost grain and reduced consumer demand have certainly impacted the profitability the protein complex (beef, broiler chicken, and pork) since 2009. One thing not commonly discussed for the broiler chicken industry is the domestic U.S. market has reached or is reaching the maturity stage of the product life cycle. In the mature stage of the product life cycle, the sales growth rate will slow down. This is not to say that the industry will experience a contraction in demand that the beef industry has seen since the 1970s, but annual production growth rates of more than 4% will be unlikely to happen on a regular basis. Excess supply/overcapacity commonly occurs in a mature industry, but it’s difficult to gauge the impact of excess supply in light of the current domestic economic situation. As the rate of sales growth slows, so will the demand for additional broiler houses. Year-to-date broiler exports have been a bright spot for the broiler chicken industry and growth in these markets will be needed to help U.S. domestic broiler production in the future. Russia has historically been the number one market for U.S. broiler exports, but continues in its desire for its domestic production to be self-sufficient and replace U.S. broiler production in Russia. Price sensitivity of export markets is always a concern and is present with foreign markets developed by the U.S. broiler industry in recent years. Most of the consequences from the domestic broiler industry reaching maturity will be decided by the vertically integrated firms as they are responsible for marketing decisions. However, there will be some impacts on the contract growers. Maintaining production efficiency will be critical as will closer scrutiny of any future contracts offered by integrated firms. The proposed revisions to the Packers and Stockyards Act may provide some additional aid to contract growers, but there are always unintended consequences associated with agricultural policy.