Two chicken processors reported and for the first 9 months of fiscal 2008, Tyson’s chicken segment and Pilgrim’s Pride have collectively lost $263 million. This trend can’t continue.
- Pilgrim’s Pride reported a net loss from continuing operations of $48.3 million in 3Q08 and a net loss of $193 million year-to-date, primarily as a result of higher feed costs, which were up 41% YOY in the quarter and are expected to be up $900 million for FY08. Something has to change for PPC! The company has cut back on chicken production to increase prices, but reductions have not yet been enough to cover costs. The average breast meat price in 3Q was $1.47 per pound and prices have already declined 10% since the end of the quarter to $1.33 per pound. Management stated that based on current expectations, breast meat prices need to reach $2.15 per pound just for the company to breakeven. That means prices need to increase over 60% just for PPC to cover its costs. Chicken prices are inevitably going higher.
- Additionally, Pilgrim’s Pride stated that it is taking steps to shorten the duration of its fixed price sales contracts. It is moving away from its previously standard 1-year timeframe to 90 day contracts. Currently, 17% of its sales are being driven by annual basis contracts, but they will expire as of January 1 and the company has no intention to enter into any new annual contracts at that time.
- Darden and Sonic have both commented about their decreased opportunities to enter into longer-term contracts, resulting in their having to float more of their key commodity exposures. I wrote about the impact this increased volatility will have on restaurant operators’ income statements on June 25, highlighting that it eliminates some certainty to the restaurant industry’s earnings model.
- PPC management also stated that it is not seeing customers walk away as a result of these new terms, which indicates that restaurant operators recognize that these shorter term contracts are part of their current reality.
Thank you, Walt Disney for the picture of Chicken Little