How is the Poultry Industry Impacted by Commodity Prices?
Rising corn and soybean prices are boosting financial prospects for the producers of those crops. The flip side of that pricing success is that the consumers of corn and soybeans are feeling tremendous cost pressures. Poultry producers and processors, and egg layers and processors, have seen their feed costs increase 50% or more since the second half of 2020. The poultry business has notoriously tight margins, which means feed cost increases may be an insurmountable change for many market participants.
Corn prices over the last five years are shown in the graph below. This clearly illustrates the price increases users of corn are trying to manage. Producers and processors made operating and financial performance decisions focused on the ability to produce profits when corn was at $4.00 to $4.25 per bushel. While poultry producers and processors expect there will be commodity price cycles that provide higher profits and lower profits for periods of time, a producer or processor was able to manage to a feed cost range and overlay liquidity and capital needs within that range. With corn at over $6.00 per bushel the feed component of the costs to produce chickens has increased over 50%.
At the same time, the price for chickens has not increased to offset these feed cost increases.
The poultry industry has experienced periods of high feed costs in 1995/1996, 2008/2009, and also 2011/2014. During each of these increased feed cost time slots, poultry producers were confronted with difficult decisions related to feed, access to capital, and access to working capital.
The price received for poultry does not align with feed cost changes. This next graph shows poultry prices over the same 30 year time frame.
Egg producers have also not experienced price increases to offset the feed cost changes.
Clearly a direct correlation between feed costs and poultry and egg prices does not exist. This next graph shows that while corn and poultry prices had trended upward over the 30 year time horizon, there are months and years where the relationship between input costs and poultry prices reduces a individual producer’s and processor’s ability to generate consistent financial performance.
Using a similar comparison of egg and corn prices over a twenty-two year time period shows the growth in corn prices exceeds the growth in egg prices.
These macroeconomic conditions put each producer or processor at risk. While an individual business may have been able to reduce costs through automation, or increase prices received through value added services, micro economic decisions made at the individual processor level are unlikely to offset the full impact of the change between the relationship of feed costs and poultry prices. For example, while an egg producer could change to higher value brown, organic, or cage free eggs to increase sale prices, the price of corn remains an impactful macroeconomic issue.
What can a lender do?
Timely receipt and review of financial information is key. Delays in preparation of monthly financial statements and borrowing base certificates (“BBCs”) should be an indication to press for reporting to be received on time and as agreed. More frequent reporting and field exams should also be considered.
Review of customer contracts and supplier contracts to analyze the relationship a processor has from a legal and pricing perspective are important. If a lender does not have that information, requesting it or requesting a field exam to capture the information could be a useful tool for the lender. Many poultry processors provide feed cost support to the growers. Some processors have limited the amount of increase allowed on an annual basis. This pushes the feed cost risk down to the producer/grower level which, in turn, means the lender to the producer/grower needs to consider their risk.
The impact of changing food prices, inflation, and labor shortages will also need to be evaluated. Some processors have been unable to keep their employee count at the level it needs to be. Offering higher hourly rates, signing bonuses, and increased benefits has become common place. Refer to the “How Can Companies Deal with Labor Shortages” article to further consider the impact of labor problems and any increased labor costs on financial performance. Inflation creates interest rate concerns as well as driving changes in consumer buying habits.
Understanding how an individual producer or processor manages their pricing risk is important. Approaches to hedging vary greatly and need to be reviewed on at least a monthly basis. Requiring receipt of hedging account statements, and discussing those statements with management, is a successful approach to better understanding market price risk.
This is a critical period for liquidity and profitability for the entire poultry industry. The change in commodity prices that impacts the poultry inputs is one of the worst price cycles the industry has encountered.