For only the fourth time in five decades, chicken production in 2012 will decline when compared with the previous year. Unfortunately for employees and contract family farmers who grow the chickens, the decrease will likely be of the magnitude experienced in 2009, when production dropped almost 4 percent.

Simple, basic economics offers a brief answer as to why the significant downward adjustment in output is happening. If enough companies lose enough money long enough, the collective industry has little option other than to try to match supply with a demand level that will return the situation to break-even or profitability. A large majority of chicken companies have sustained significant losses since late 2010. Whether these losses were financed by digging deeper into their own pockets and/or the pockets of the financial lending institutions, companies have gotten the message: “enough is enough, stop the bleeding.”

Major decisions to change the direction of chicken production have been made, and the outlook is highly unlikely that any real change in plans will be undertaken until the 2012 corn harvest is securely stored in the grain bin, a year from now.

Significant shortfall in 2011 corn harvest impacting outlook

Without enough corn from the 2011 harvest to adequately meet all needs, animal agriculture has found itself as the last man in a somewhat short line of “who gets the corn.” Ethanol manufacturers stand at the front of that line, holding a federal mandate for the usage of their product and a tax credit subsidy that allows ethanol manufacturers to outbid other buyers of corn.

Next in line comes the export market, with overseas importers seeing a relatively more favorable corn price, as the weakened U.S. dollar makes it more affordable than to a domestic buyer.

Queueing up in the animal agriculture segment of the line is the pork industry, which has been fairly profitable despite high corn and soybean prices. Strong world demand for U.S. pork and disciplined production plans by major hog producers have tilted the supply/demand balance in favor of the pork producers.

At the same time, the beef industry is rapidly moving into the part of its cycle when there will be fewer numbers of feeder animals in feedlots. This situation will result in significantly less demand for corn and other feedstuffs from the cattle industry.

Also, ruminants, such as beef cattle and dairy cows, can more readily incorporate dried distillers grains with solubles (DDGs) into their feed rations. DDGs are a byproduct of the ethanol industry and are becoming more abundant as the ethanol industry ramps up its production, month-after-month. DDGs can be used in poultry feed rations up to a somewhat limited level (about 5 percent or so of the total feed ration), but the ethanol producing process has drained most of the feed energy from the DDGs.

Like the pork industry, the beef industry has been much more profitable when compared with chicken. Expanding export markets for U.S. beef have given cattle producers the ability to ask for and get prices that cover their higher feed costs.

Normally, such profits encourage cattlemen to expand their breeding herds and generate more steers for the feedlots. A number of factors, such as the major drought in the Southwest, the aging population of the cow/calf rancher, the uncertainty of the future of the U.S. economy and the ability of consumers to afford higher and higher priced beef, has caused an unprecedented share of brood cows and replacement heifers to be sent to slaughter well before their time.

It could be as long as four years before beef production begins to return to the level seen in 2011. Average per capita consumption of red meat (beef, pork, lamb and veal) is projected for 2012 to be less than 103 pounds, the lowest level in more than three-quarters of a century.

Where’s the opportunity?

Will chicken be able to take advantage of the “beef gap” and the overall unprecedented drop in red meat consumption? To increase consumption of any food, economists generally agree the best way is to have more consumers eat that food more often. Having more consumers eat chicken may be a challenge, since more than 93 percent of households already eat chicken at least once every two weeks, compared with a recent low market penetration rate of 85 percent in 2008. Such market penetration is considered very high for any food.

Also, the average consumer is eating chicken 5.7 times in a two-week period, up from 4.5 times in 2007. Increasing the times chicken is eaten during a certain period should be easier to accomplish than increasing the household penetration rate.

While the higher consumption issue will not be a problem during the production downturn in 2012, chicken companies will take the “time out” to determine new chicken products that should have the best chances for success when more normal production levels return in 2013.

Coarsely ground chicken will be given a better opportunity to compete with higher and higher priced ground beef in the next few years. Whole-muscle breast meat products have provided success to many chicken marketers since 2000, but now this array of breast-based products seems to have slowed in pace as companies retrenched their R&D programs in 2011. In many markets, boneless/skinless thigh meat competes very well with its white meat counterpart.

The peak in chicken consumption was 88 pounds in 2006. Some marketers would say that this level of 88 pounds was achieved with the products already in the marketplace, so why be concerned about emphasizing new products? While this conclusion can be viewed as valid, an opportunity to build on prior success seems more reasonable than the option of resting on prior success.

The ultimate temperature of the porridge?

In a previous report, an analogy was made about the chicken business being somewhat like Miss Goldilocks and how she likes her porridge. Miss Goldilocks liked her not too hot/not too cold porridge in 2010, but found her bowl of substance much too cold in 2011.

In 2012, Miss Goldilocks should begin to find a more palatable bowl of soup, albeit the soup bowl will be somewhat smaller than the size of her usual liking.

How palatable the porridge will be depends, as it always does, on a number of factors, such as the strength of consumer demand, especially at foodservice and in world markets; the size of the hatchery supply flock; the size of the 2012 corn harvest; and a number of other significant factors unknown at this time but not unexpected in hindsight.