Poultry Industry May Face Losses Thanks to Corn Prices
As corn is being harvested in the U.S., the first sector to reflect this summer's record prices is poultry.
Chickens grown for meat have a short lifespan compared to hogs or beef cattle; they mature in seven to eight weeks. That means the first birds fed $8 corn will soon hit the market.
"We estimate that the average producer, by December, is probably going to be losing somewhere on the order of 5 to 10 cents a pound," said Heather Jones of BB&T Capital.
Chicken wing prices are already at record levels, averaging $1.90 a pound now, double what they were a year ago.
Even so, poultry prices are not high enough to cover the cost of the corn and soybeans used to feed the birds. (Read More: Breakfast in America: The Real Cost of Corn.)
"We're holding our own right now," said Mike Cockrell, Treasurer and Chief Financial Officer for poultry giant Sanderson Farms . "But when we start feeling the full brunt of these grain costs, with current chicken markets, there won't be many companies, if any, that can make that work."
Cockrell said his company is spending $63 million more on feed this fiscal year, which ends in October. If corn prices stay at elevated levels, he said the company could be forced to spend as much as $250 million more next year. (Read More: Smallest Corn Crop in Six Year Better Than Worst Fears.)
In response, the poultry industry is starting to plan for production cuts by ordering fewer "egg sets."
BB&T's Heather Jones said the impact of reduced supply will start to be seen by the end of November, and by January, poultry prices could be as much as 10 percent higher, regaining solid margins.
BB&T has a "buy" rating on Tyson , because Jones said the company has flexibility built into its contracts. Tyson can renegotiate if feed costs spike, a model that she said Pilgrim’s Pride also uses.
However, she has a "hold" on Sanderson Farms, which has a very different business model. That company is only selling chickens at spot market values, which, at the moment, is becoming unprofitable.
Over the next few months, the environment will favor Tyson and Pilgrim’s Pride, Jones said, but once prices rebound next year, "Sanderson will be one of the first to benefit because it is on the spot market."
Costco told CNBC that its poultry producers are asking for a break on contracts, pleading with the company to pay as much as seven percent more for chicken. The retailer is willing to help, to a point. Costco said so far it has not passed through any higher chicken costs to consumers, but, “come January, when new contracts are due, it will be challenging.”
Many producers, like Sanderson Farms, did not lock in a significant amount of feed costs earlier this year, back when corn was in the $5 range.
"There was no reason to believe in May that $5 was going to be a reasonable price for corn," said Sanderson's Cockrell.
The U.S. Department of Agriculture was predicting a record crop, and most producers counted on the price of corn going down. That quickly evaporated as the worst drought in a half century hit the Midwest. (Read More: Massive US Drought Leads to Worst Fears for Corn Crop.)
"We had priced all of our grain needs through July," said Cockrell, "but we've been back on the market since August, and we're basically hand to mouth right now."
As for approaching Sanderson Farms' customers — often restaurants and bars — to ask for more money than the spot market price for chicken, Cockrell said his company won't change its business model.
"Frankly, if we go to them when we're losing money, they'll probably come back to us when the chicken market gets real strong, and that's when we make a lot of money," he said. "We'll live by the deal that we've made with them."
—By CNBC's Jane Wells