The U.S. chicken industry may become unprofitable in the fourth quarter because feed costs have surged as a drought wilts cornfields across the Midwest, said Koch Foods Inc. Chief Executive Officer Joseph Grendys.
“Costs have gone up so much due to the drought that the industry will be forced to get price increases of 10 to 15 percent across all product lines” for 2013 over this year, Grendys said in a telephone interview yesterday from Koch’s headquarters in Park Ridge, Illinois.
The closely held company, which says it’s the fourth- largest U.S. chicken producer by sales, is starting to talk to customers about 2013 prices. Koch expects to sign one-year supply contracts with clauses allowing for quarterly adjustments according to grain costs, Grendys said. The last time the company sought quarterly adjustments was in 2008, he said.
The U.S. chicken industry returned to profitability in January after months of losses amid a supply glut, according to investment bank Stephens Inc. Production has declined in the first half of 2012 and rising feed costs now threaten to erode margins.
Most-active corn futures in Chicago rose to a record $8.49 a bushel on Aug. 10 and soybeans reached a record $17.4475 a bushel today as the worst drought in five decades reduced crop yields. U.S. corn yields may be even lower than the 123.4 bushels per acre that the U.S. Department of Agriculture forecast on Aug. 10, Grendys said.
While demand for Koch’s chicken products is “extremely strong,” uncertainty caused by the drought is leading the company to analyze its sales against the cost of raising chickens, Grendys said. The industry has reduced production costs over the last decade and can’t count on lower input costs in the future, he said.
“The industry needs to be smart” and focus on pricing to ensure it remains profitable, he said. Even if it does become unprofitable in the fourth quarter, the industry may resume making money after the first quarter of 2013, he said.
Tyson Foods Inc. (TSN), the largest U.S. chicken producer, said Aug. 6 that its chicken unit will be profitable in fiscal 2013 based on current grain prices because of operational improvements and cost cuts. Springdale, Arkansas-based Tyson has reduced the volume of its poultry under annual fixed-price contracts to less than 15 percent.
Prices for most of Tyson’s birds are either tied to specific markets or “allow for conversations about adjusting prices” to offset higher inputs, Chief Operating Officer Jim Lochner said on a conference call with analysts on Aug. 6.
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