Poultry Processing Economic Review

By Juanita Schwartzkopf and Lassiter Mason

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Focus Management Group has prepared an economic industry overview and restructuring strategy discussion to assist stakeholders in their review of portfolio poultry industry operators.

For a copy of our detailed analysis, download the PDF.

Executive Overview

The U.S. poultry industry exhibits many unique characteristics, which combine to create challenges for stakeholders seeking to develop turnaround or restructuring strategies for poultry companies. This Paper seeks to provide the reader with an overview of the poultry industry, and to provide insight related to turnaround and restructuring considerations in this niche market.

Our study analyzes the changing relationships between broiler prices (chickens raised for meat) and feed costs, and assesses the resulting complex decisions facing poultry processors regarding flock management, further processing, optimal bird weight, etc. We also identify how the interaction of key performance indicators can serve as a pivotal tool in determining the viability of a poultry operation. In the case of non-viable operations, we discuss at length the factors that must be addressed when considering a poultry processor liquidation.

Finally, the Paper outlines in detail how potential fluctuations in the commodities markets in 2012 may result in additional margin compression for poultry processors, exacerbating an already challenging situation existing today in the U.S. poultry industry.

Industry Overview

• The U.S. poultry industry is highly concentrated: two poultry processors represent 40% of the market, and over 90% of the market is captured by two dozen companies. Exports represent 20% of broiler production. A majority of exports are shipped to Russia, China and Mexico.
• Poultry prices are not determined in publicly traded markets, in contrast to markets which establish prices for commodities such as corn, cattle and hogs. Though the establishment of a poultry futures market has been attempted in the past, all such efforts to date have failed.
• Instead, prices for poultry are negotiated between individual suppliers and purchasers, with average daily prices being reported to the Georgia Department of Agriculture, which then posts these prices, effectively creating the “market price” for poultry.
• The U.S. poultry industry is currently experiencing a period of increasing input costs (feed) and increasing output prices (meat). However, price increases for outputs have lagged input cost increases, thereby creating financial distress for many industry participants.
• Feed costs fall outside the direct control of industry participants. For example, the price of corn (a major feed component for the poultry industry) has risen in recent years in part as the result of increased demand for corn arising from ethanol production. While industry participants are able to vary their feed component mix within set parameters, during times when all feed components increase in price, the net impact to poultry producers will be reduced profitability.
• Poultry processing improvements have produced faster time to market and larger bird weights, (currently 47 days and 4.5 pounds, respectively). These improvements have been in response to steady increases in poultry consumption from 48.0 lbs/person in 1980 to a peak of 86.0 lbs/ person in 2006. However, recent increases in meat prices have caused total consumption per person to drop from the 2006 peak to 83.6 lbs/person in 2010.
• The poultry industry is currently in distress. Bankruptcies, liquidations and consolidations are becoming ever more frequent. The survival of the industry’s participants will depend upon their individual ability to maximize efficiency and minimize cost until equilibrium can once again be achieved between feed costs and poultry prices.

Turnaround & Restructuring Alternatives

• When analyzing the performance of a poultry processor, it is important to differentiate between the impact of day-to-day management decisions and the impact of larger macroeconomic factors. Critical to any performance recovery is an understanding of the root cause of financial performance problems.
• Turnaround success is centered on understanding the operating performance of the individual poultry producer. Throughput is a key element to reducing production costs. Availability of throughput metrics, including downtime, yield per line per hour, etc., is critical to evaluating turnaround and restructuring options. Also, critical is an understanding of vendor and customer contracts and their impact on cash flow.
• The Focus Poultry Performance Matrix provides a unique tool for understanding the combinations of performance which can result in a poultry producer achieving success. The output from this Matrix, when coupled with analysis of a poultry producers’ various metrics, contracts, etc., provide stakeholders with an ability to assess the likelihood of an industry participant attaining these combinations of performance that result in positive financial performance.
• Restructuring measures may be required if a financial and operating performance turnaround cannot be achieved under prevailing conditions. Such restructuring options include both in-court and out of court alternatives, ranging from direct lender negotiations to Chapter 7 liquidation.
• Turnaround and restructuring options in the poultry industry are complicated by the existence of potentially millions of live birds in production at any point in time. It is not possible to immediately close an operation that is struggling or failing. Careful planning is required in order to avoid significant loss of value.
• The industry-specific characteristics outlined in this Paper create diverse challenges for poultry processors and their stakeholders. Continued increases in feed cost, combined with lagging market prices for poultry products and reduced consumption, have created margin stress on all aspects of the industry.
• In the face of such margin stress, processors and their stakeholders must quickly and carefully examine all factors affecting operating throughput to obtain advance warning of possible liquidity issues.
• Failure to closely monitor poultry producers for signs of negatively trending performance metrics, and rapidly address issues identified at poorly performing operations, can result in unnecessary loss of collateral and/or recovery to stakeholders.
• The output from this Matrix, when coupled with analysis of a poultry producer’s various metrics, contracts, etc., provide stakeholders with an ability to assess an industry participant’s likelihood of attaining those combinations of performance that would result in positive financial performance.

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