WHILE a closer look at poultry industry-specific returns will come in the Aug. 12 edition of Feedstuffs with the semi-annual update of our long-running profitability series, indications are that things in the sector are getting better all the time.
Pilgrim's Pride reported a 175% increase in year-over-year net income in its fiscal second quarter, and, excluding one-time charges, Cal-Maine Foods saw a 7.7% increase in its net earnings for the fiscal year.
"The poultry industry is seeing huge profits," said Jim Robb, director of the Livestock Marketing Information Center (LMIC). "Granted, the turkey side isn't doing nearly as well, but chicken is doing extremely well."
Robb views Pilgrim's earnings as a key insight into the poultry sector's outlook for the rest of the year.
"Pilgrim's said they see a relatively slow rate of expansion compared to historic norms," he explained. "The breeder supply flock is not growing that much, but it really doesn't take very long to grow that number."
In the company's quarterly call with investors, Pilgrim's chief executive officer Bill Lovette said the firm's ability to "adapt to changing marketing conditions" helped it gain significant business while taking advantage of "strong fundamentals."
Those strong fundamentals include improving feed costs and a favorable retail price for chicken relative to other protein options, Robb explained. Chicken prices have moved higher this year while siphoning off some demand from the beef sector, which is currently seeing record or near-record retail prices in the face of a tepid economic recovery.
Many analysts assume that expansion is occurring in the poultry sector already or, if not, that it will be coming soon. However, Pilgrim's analysis suggests a fairly moderate increase in the size of the breeder supply compared with past trends.
The company noted that the average annual hatching layer supply in 2012 was 50.9 million head, the smallest number since 1996 (Figure 1). Pilgrim's projected the 2013 layer supply to increase to 51.7 million but attributed that increase primarily to a reduction in hen slaughter rather than to outright expansion.
That projection would indicate a breeder supply that is 6.3% smaller than the 10-year industry average, but Robb noted that expansion plans can change fairly rapidly in the sector.
"Output can expand more quickly. The profitability of the chicken industry is going to be much stronger in the third quarter as feed costs come down, and the fourth quarter is going to be darn good, too," he explained. "Historically, the ramping up of the breeder supply flock has been driven by the profitability in the industry, and that's almost back to an unprecedented level. It's been close to a decade since we've seen this level of profitability."
Broiler-type hatching layers for the month of June totaled 52.95 million, up 1.36% from last year, and Pilgrim's noted that producers continue to extend the average age of hens, which affects egg production and hatchability. Egg production per 100 layers increased slightly in June versus year-ago and is running well ahead of the five-year average.
Pullet placements during June were 7.0 million, up 3.1% from June 2012 and right along the five-year average for the month. Year-to-date chick placements through the 29th week of the year also improved slightly from 2012, but the running tally is still several-hundred-thousand behind the five-year average.
Cold storage of poultry increased slightly year over year as of July 1, up 2.8% from historically small storage in 2012. USDA reported 664 million lb. of chicken on hand, a volume that is still smaller than a single week's production.
There are two key factors that will determine how long a good thing lasts in the sector: (1) feed costs, which are something of an X-factor yet given the tight nature of current supplies, and (2) how quickly the breeder flock expands. Chicken prices are running stronger than in recent years, and how those prices look to export markets could play a sizable role as well.
"We export more than 20% of our chicken production," Robb noted.
Annual U.S. chicken exports have exceeded 7 billion lb. each year since 2011 and are expected to set a record at just under 7.4 billion this year (Figure 2).
Pilgrim's noted that if production increases 2.5% next year, 2014 exports could easily exceed USDA's current forecast of 7.6 billion lb.
Egg demand, prices
For Cal-Maine, the nation's largest egg producer, sales were strong last quarter and trending up. In its fourth-quarter earnings report, Cal-Maine noted that sales were up 18% from the same period in 2012, with a 6% increase in eggs produced and sold.
"For the year, we were pleased to exceed our previous year's record with $1.3 billion in sales," Cal-Maine CEO Dolph Baker said. "We experienced strong demand for shell eggs throughout the year from our retail, egg product and export customers."
Baker noted that the company's average selling prices were up 7.9% in fiscal 2013, which ended June 1. Cal-Maine attributed some of that increase to stronger demand for specialty eggs, which saw a 7.8% increase in volume and a 6.1% increase in price.
The egg producer also expects to benefit from better corn and soybean crops this fall, providing some feed cost relief in 2014.
"Our operations have continued to run quite well in fiscal 2013 (despite) experiencing higher and more volatile feed costs primarily related to a tight national corn supply," Baker explained. "Our feed costs per dozen were up 15% compared with fiscal 2012, and the higher input costs adversely affected our gross profit margins."
Baker said he is "cautiously optimistic" about prospects for improved crop yields and feed costs.