SAFM commented that the company is looking at corn delivered into its feed mills at over $6 a bushel and soybean meal delivered into the mills at $380+ a ton. Currently, SAFM is looking at selling breast meat at $1.30, which means that the company is expecting to lose money for the foreseeable future. Just for SAFM to reach average margins, breast meat would need to average $1.85 to $1.90 for 12-months. That represents at 40%+ increase in breast meat. There is no restaurant company that I know of that could handle that kind of chicken inflation.

  • The chicken processing industry is not alone. If the chicken processors can’t make money buying corn and soy at those levels, it’s hard to imagine that pork and beef processors can make money either (Just look at how higher grain prices impacted Smithfield Foods’ results reported earlier this week). Importantly, it does not look like it’s going to get any better any time soon. Looking ahead, corn contracts for delivery in the spring are priced between $6.50 and $7.00, potentially making the situation worse in 2009.

  • Given the current economic climate, the relevant issue that remains unclear is the impact on demand for protein. Given the current rate of losses in the chicken industry, the over abundance of processing facilities will correct itself. A critical element that needs to remain in place is the export market, especially shipments to Russia. If political tensions heat up over the Georgian invasion; and the export market were to slow (implying supply would remain an issue), bankruptcy is all but certain for some processors.

  • As you can see from the charts to the right its bull market for farmers of crops, but not livestock! A quick comparison of the USDA index levels for prices received by farmers shows that, while livestock prices are up significantly –they have failed to match the pace of crops. Livestock farmers have felt the pressure as the trajectory of grains, soy and corn prices has continued to squeeze their margins. For the chicken processors, production rationalization has not taken place to any meaningful degree.