Dealing with Rising Costs

By Andy Hanacek, executive editor

Simply put, the poultry industry enters 2008 facing new challenges different from those of one year ago. Gone — well, maybe not gone, but certainly muffled — is the media-spurred anxiety of early 2007 over high-pathogenic avian influenza and its potential to infiltrate the United States’ poultry flocks. In its place, myriad issues have taken up residence, and the red meat industry faces many of these as well. In the following story, The National Provisioner highlights four of the key challenges that could keep processors up at night across the vertically integrated chicken-processing marketplace.
Country-of-origin Labeling
Depending whom you ask, country-of-origin labeling (COOL) will be either a blessing or a curse for processors if it becomes mandatory in the United States If you ask chicken processors, they’ll tell you it’s a blessing, for the most part. At least those members of the National Chicken Council (NCC) will. In fact, the NCC membership voted to place chicken under the mandatory COOL requirements, a decision that Bill Roenigk, senior vice president of the NCC, says took some time to make.
“Some people ask, ‘Why do you want in when most other commodities that are in want out?’” he says. “Back in 2005, when this first came up, we were asked if we wanted in, and we said, ‘No, thank you.’ But at that time, there was very little chicken imported — some from Canada, and that’s still the case. So imports of chicken in the United States then and even today are not an issue.”
Roenigk explains that the future, however, holds no promise of continued minimal impact from imports — once more chicken is imported from countries beyond Canada, possibly from countries with track records of having not such a safe food supply, NCC members are concerned that consumer confidence would be undermined for the entire segment. COOL would allow consumers to know what chicken was produced under safe processing practices in the U.S. and other safe countries, and what products to maybe shy away from, rather than avoiding chicken products as a whole.
Processors caught up in COOL would have to make changes to meet the requirements if COOL were to be made mandatory, but Roenigk believes the chicken industry is well-positioned to be able to absorb the changes a little better because of its vertical integration.
“[The change is] not minor, but there will have to be additional investments in record-keeping and filing of forms to make sure everything is in order,” he explains. “The retailer, I believe, is the one who will have the burden for mislabeling, but of course, if there is something amiss at the retail level, they will quickly come back to the supplier, whether it’s chicken or beef or pork, and look to their supplier to work all this out and take care of any sort of regulatory issues.”
This strategy, Roenigk believes, will lead to a better structuring of the retailer-processor relationship in terms of who bears responsibility for different issues. The regulatory step will get the ball rolling, but only once a system meets real-world situations will the details of that system be fully fleshed out.
Corn: Feed vs. Fuel
The rising cost of corn and soybeans to producers and vertically integrated processors has been an ongoing issue that simply won’t seem to go away. Although corn producers must be pleased at the skyrocketing demand for their crops, the meat and poultry industry is not pleased at the increasing prices for corn, as they now must contend with ethanol producers for purchase power on corn.
But dealing with the rising costs of feeding your flock isn’t a straightforward situation. According to Roenigk, rising corn prices forced the chicken industry to pay $3 billion more to feed its flocks between October 2006 and November 2007 than it would have paid if corn prices had stayed where they were prior to that period. That additional cost must be passed on to consumers, and the industry has done just that — however, it has without losing much in sales, Roenigk notes.
World Corn Production
Country/Region Production
(Metric tons per hectare)
Change in Production
(Million metric tons)
     
2007/08 Proj.
From last year
  2005/06 Prel. 2006/07
Nov
Dec
Million metric tons Percent
World696.37703.85768.22769.3165.469.3
United States282.31267.6334.48334.4866.8824.99
China139.37145.48145145-0.48-0.33
Brazil41.7515050-1-1.96
Argentina15.822.522.522.500
Mexico19.52223.223.21.25.45
India14.7114.9816.316.31.328.81
France13.6812.1513.514.11.9516.05
Italy109.49.59.50.11.06
Canada9.368.9910.5611.652.6629.59
Romania10.38.53.63.6-4.9-57.65
Hungary8.78.13.93.9-4.2-51.85
Nigeria77.86.56.5-1.3-16.67
South Africa Republic 6.947.310.5102.736.99
Indonesia6.56.7770.34.48
Serbia06.424.24.3-2.12-32.97
Ukraine7.156.477.4115.63
Philippines5.886.236.16.1-0.13-2.09
Egypt5.935.945.985.980.040.67
Ethiopia454.84.8-0.2-4
Vietnam3.824.314.564.560.255.75
Thailand43.83.853.850.051.32
Russian Federation3.23.63.53.80.25.56
Turkey3.72.83.72.90.13.57
Poland1.951.261.81.80.5442.74
Zimbabwe0.90.60.850.850.2541.67
Others69.986565.3565.250.250.39
Total non-U.S.414.06436.25433.75434.84-1.42-0.32
Source: U.S. Department of Agriculture — Foreign Agricultural Service

“As it turns out, for the most part this year we’ve been able to pass on those higher costs, and consumers seem to be willing to buy chicken at higher prices,” he adds.
Without enough available open cropland in the U.S. to meet the demands for corn, he says that relief will come when the industry has a very significant breakthrough in yields — one that will take the industry from 153 bushels per acre to 175-180 bushels per acre. Roenigk believes that day will come someday, and corn seed companies are quite optimistic that they are on the edge of that breakthrough.
All that said, the poultry industry has stared problems such as this in the face before. In fact, in 2007, the industry anticipated difficulties in the marketplace in light of higher prices being passed on to the consumers. In response, the industry held down production.
“We’re up [in 2007] less than one-half of one percent, and when you think our normal annual rate of increase is four percent or better, to increase production only one-half of one percent is pretty dramatic,” Roenigk says.
Much of the industry’s success will depend on the start of the planting and growing seasons for corn and soybean crops next spring. Roenigk states that companies will need to make preparations to face what should be a very volatile market for commodities.
Annual U.S. Corn Prices
YearPrice per Bushel
2007T.B.D.
2006$3.04
2005$2.00
2004$2.06
2003$2.42
2002$2.32
Source: U.S. Department of Agriculture — National Agricultural Statistics Service

Annual U.S. Soybean Prices
YearPrice per Bushel
2007T.B.D.
2006$6.43
2005$5.66
2004$5.74
2003$7.34
2002$5.53
Source: U.S. Department of Agriculture — National Agricultural Statistics Service

“What [industry] did in 2007 was demonstrate discipline, which I believe will be more important in 2008,” he advises. Further, Roenigk says the poultry and livestock groups must continue to pressure Congress to consider having safeguard legislation in the Farm Bill or Energy Bill that protects the poultry industry if there is a shortfall in corn, given the mandates the government has in place for ethanol production.
“Some people believe we are overly criticizing ethanol,” he says. “We’re certainly not opposed to greater energy independence on the part of the United States — I think we all agree with that. It’s just a matter of how fast and what pathway you take to get there.
“The way we look at it, the playing field for buying corn is not level, because the ethanol people have an advantage in terms of the net costs they have to lay out for corn.”
Labor Issues and Immigration
“Higher feed costs from ethanol production is important, and we wrestle with that every day and week,” Roenigk says. “But immigration, and the tightness in the labor supply, is something that essentially every day, every shift, every plant is wrestling with — the question of where to find enough legitimate, documented workers to get all the work done that needs to be done.”
Roenigk’s assessment sums up one of the key developments in 2007, which has spilled over to 2008. Immigration and the labor issues that all processors deal with, figure to be high on the list for the next year-plus. And there doesn’t appear to be an easy solution around the corner, with the government often tying its own hands on the issue and a presidential election on the way. Roenigk is hopeful for a resolution, but he thinks that the industry is more likely to see baby steps toward a solution — and that only after the presidential election.
In the meantime, poultry processors will have to fight the daily battle of employing a securely documented workforce with an eye over their shoulders toward what the government is doing on the subject. It creates a difficult decision for some companies.
“The more critical part is, as the market moves more and more to value-added, built-in attributes to make it easier for consumers, all those steps take more and more labor,” Roenigk explains. “That’s where the rub comes, and in fact, some companies are outsourcing to smaller, independentfurther-processors to get some of their further-process production done because they just don’t have the workers.
“It’s caused some companies to scramble to build these value-added markets. They know that’s where the market’s going, they know that’s what consumers want, but more and more it takes labor to get that done.”
Renewable Fuels and Energy Costs
Where renewable fuels and energy costs are concerned, technology and science are still working on breaking through the ceiling to find more reliable alternatives to corn-based ethanol in order to give some relief to the animal-feed industry, but there is much work to do. Cellulosic ethanol is the main target of research, but there are mixed opinions on how close the scientific community is to reaching that breakthrough with cellulosic ethanol.
“If you talk to some people, they’ll say in five years we’re going to have a breakthrough,” Roenigk adds, “and some people say that in five years people will be saying, ‘In five years, we’re going to have a breakthrough.’ Some day though, I suspect, we will find the right organism that can take cellulose and more efficiently turn it into ethanol, and we’ll have the technologicalbreakthrough.”
But even with that technological breakthrough, the challenges of creating cellulosic ethanol go beyond the technical side of the business. Logistics, Roenigk says, could be a serious hangup.
“I think the more difficult challenge for cellulosic is the raw material, whether it’s switchgrass or corn stalks or something else,” he says. “How do you bring that much raw material to an ethanol plant and have it turned into a gallon of ethanol? ... In Brazil, the plants make ethanol from sugar and then more from the sugar cane, ... but the sugarcane, the stalk, is there at the plant where they make the sugar. When you bring corn [to the ethanol plant], you’re not bringing the stalk in, and I don’t think that’s going to change.”
Furthermore, farmers know that organic matter must be replenished in their fields every year, so taking dead organic material off the fields for ethanol production may not be feasible along those lines as well.
For poultry and pork processors, the big breakthrough in the production of ethanol will come when the scientific community can find a byproduct that can be used as a feed ingredient for their single-stomached animals. Currently, distillers dried grains with solubles, or DDGS, is a byproduct that is very high in fiber, has a fair amount of protein and can be fed to ruminants, whether it’s beef cattle or dairy cattle. Research in this area is moving full-steam ahead as well.
The positives for 2008
Bill Roenigk, senior vice president of the National Chicken Council, shares his views of the opportunities for the poultry industry in 2008.
“The opportunity for our industry in 2008 is what we’ve seen this year and I’ve been pleasantly surprised about. That has been a very strong export market. When you take Economics 101, it says, ‘If the price of a product goes up, the consumer will buy less,’ and then you throw in there, ‘assuming everything else is equal.’
Well, what’s happened in the world marketplace is, the price of chicken went up, but nothing else stayed equal or the same. A whole lot of things have changed.
The U.S. Dollar has weakened, which allowed chicken prices in terms of Euros or Yen or other currencies to not look quite as high as they do look domestically.
We’ve also seen countries like China and even Russia, their economies have developed to where more and more consumers have discretionary income. When they have a few extra dollars, one of the things they like to do is improve their diet or menu, and animal protein is one of the first things they do. Chicken is very affordable, and we benefit from consumers moving up the food chain in terms of eating more protein.
The other interesting thing that’s happened is that the cost of producing chicken in Brazil is now equal to the cost of producing chicken in the United States, and that’s not been true for 10 years or more. The reason that’s the case: The European Union had a short harvest in terms of wheat ... and barley crops, so they had to reach out and buy feed grains. ... So the Europeans have bought all this corn from Brazil, and the price of corn is now $6-$7 a bushel in Brazil — high enough that it has brought the cost of production up to about where the U.S. is.
The point being, we export leg quarters, and Brazil exports whole birds. In many markets, the importing country will look at the relative price and say, ‘OK, whole birds are this much, leg quarters are this much less,’ and make some tradeoffs. But now that the Brazilian cost of production is higher than it was before, they cannot sell the whole birds as cheaply as they have in the past. So, I’m optimistic on exports. We had a very good year in 2007, and I think we can do it again this year.”