"Our second-quarter financial results reflect the significant challenges facing our industry this year from the combination of record-high feed costs, weaker-than-expected consumer demand and an oversupply of chicken," said Bill Lovette, president and CEO. "Pilgrim's total feed-ingredient purchases through the first six months of 2011 were more than $400 million higher than a year ago. At this time of year we are usually benefiting from stronger market pricing and increased demand from both foodservice and retail, but to date neither that demand nor pricing has materialized."
Market prices for some key chicken products were down sharply compared to a year ago. Boneless skinless breast meat in the second quarter averaged $1.34 per pound versus $1.61 a year ago, while the market price for wings was $0.77, compared to $1.23/lb. last year. The average market price for leg quarters was $0.46/pound, up $0.10 from a year ago, while Georgia Dock prices stayed essentially flat at $0.865/lb.
At the same time, feed-ingredient costs climbed dramatically. Market prices for corn averaged $6.99 per bushel, up 92.5% from a year ago, while soybean meal averaged $361.15 per ton, a 29.4% increase. Feed ingredient purchases, which represent the largest component of Pilgrim's cost of goods sold, were nearly $255 million higher during the quarter than the year-ago period. The company recognized $5.7 million in net mark-to-market losses related to changes in the fair value of its derivatives during the second quarter, as corn prices dropped sharply in late June as the quarter closed.
Lovette said that Pilgrim's is making structural changes in its book of business in order to share the cost burden from higher grain prices. The company is in discussion with customers to move toward a more viable business model that ties pricing for chicken products closer to the market, such as through a combination of market- and cost-based pricing.
During the second quarter, Pilgrim's sales and volume in foodservice and retail rose slightly. Export demand remained very strong during the quarter, with sales, volume and pricing hitting all-time highs for the period. Year-to-date export sales are up 65% and volumes have climbed 50% -- far outpacing growth in overall U.S. chicken exports.
"Our partnership with JBS USA is helping us enter new markets and increase our penetration in many existing markets," Lovette explained, noting that Pilgrim's share of the U.S. export market for chicken has climbed from 17% to 24%.
He said the company is making good improvement toward its target of $400 million annualized improvement in plant costs and yield improvements by end of 2011. Through the first six months of the year, Pilgrim's had achieved an estimated $270 million in annualized improvement. In addition, Pilgrim's is moving closer to its goal of performing in the top 25% of chicken companies as measured by Agristats, an industry benchmarking service.
"This is a clear sign that we are focused on the right things that can move the needle for us, including improving the mix impact. We need to capture every opportunity to improve our business and maximize the sales mix from each bird that comes through our plants," he said.
Pilgrim's Pride also announced plans to close its chicken-processing plant in Dallas, Texas, within 60 days as part of its continuing effort to reduce costs and operate more efficiently.
The Dallas plant is scheduled to close by September 30, 2011. Production from the Dallas plant will be consolidated into several other Pilgrim's facilities in the region, including the processing and prepared-foods plants in Mt. Pleasant, Texas, thus improving their capacity utilization. Other live production operations in Northeast Texas will continue to function. Pilgrim's contract growers who supply birds to the Dallas plant will begin supplying the other company plants following the consolidation. There will be no disruption in supply of product to Pilgrim's customers.
Approximately 1,000 hourly and salaried employees who work at the Dallas facility will be affected by the plant closing. Pilgrim's Pride expects to be able to offer positions at other facilities to interested employees. The company will provide transition programs to employees who are not retained in order to assist them in securing new employment, filing for unemployment and obtaining other applicable benefits.
"While the decision to close a plant and eliminate jobs is always painful, we must make better use of our assets given the challenges facing our industry from record-high feed costs and an oversupply of chicken," said Lovette. "A key component of that effort is improving our capacity utilization through production consolidation and other operational changes. By closing the Dallas facility, we can consolidate that production volume at three other plants and help those sites run closer to full capacity. In addition, we will eliminate the cost associated with transporting live birds from northeast Texas to the Dallas processing plant and shipping offal from Dallas back to our protein conversion plant in Mt. Pleasant. This will significantly reduce our costs and allow us to operate more efficiently. In addition, we believe it will go a long way toward helping position Pilgrim's to emerge from the current industry down-cycle as a leaner, more competitive company."
Lovette said there are no plans to close any other processing facilities at this time.
Source: Pilgrim's Pride Corp.