Pilgrim's Pride Cuts Back on Chicken Output: What's Left to Eat?

Mar.14.08 | About: Pilgrim's Pride (PPC)

Ironically, I just wrote about this subject in a previous post; but first mentioned it earlier in the winter - I thought it would hit cows and hogs first but it appears chickens will be the first to go. I've been writing about this group (Smithfield Foods, Tyson Foods, Pilgrims Pride and the like) since last fall, not that I am that interested in the companies themselves, but as macro economic flag bearers, especially on inflation.

These politicians have helped create an epic disaster. It is playing out step by step as I forecast, but at a much quicker pace than expected. When meat producers start cutting back in the face of a spike in world meat demand, basic economics tells you where prices are going in the future. I just wrote I expect this to happen in the next 12-18 months - I was very wrong. It is already happening. Not to mention the job losses.... but the bigger picture is the food inflation that simply continues to grow. Thank you corn ethanol. Ironically this is good for the sector because less supply = higher prices = more profits. This is the dichotomy of the Wall Street economy versus Main Street economy; what is good for one hurts the other many times.

We have another CPI report this Friday I believe. The government and Fed will tell you not to worry - as the US economy slows, inflation will magically go away. The same spin  since last August. The consumer continues to face massive issues and I'd contend that inflation continues to get worse.. from already high levels. Again, I don't know whether to accuse this Fed and all these NYC bankers economists as poor forecasters or simply ignorant. The herd has their head in the sand. Someone like me saw this coming a year ago, and these people making massive bucks cannot figure it out.

  • Pilgrim's Pride Corp (NYSE:PPC), the largest U.S. chicken producer, said on Wednesday it will close a chicken processing complex and nearly half of its U.S. chicken distribution centers as it copes with soaring feed costs and an oversupply of chickens.
  • The news sent Pilgrim's Pride shares, as well as those of other chicken companies, higher on the theory that less production will benefit the chicken industry. "Clearly this news is positive for the group," Pablo Zuanic, food analyst at JP Morgan, said in a research note. "We expect by the summer combined cutbacks of about 3 percent by the industry."
  • "I'm not surprised given the unusually high price of grain, which is restricting the ability to sell chicken domestically," Paul Aho, an economist with the consulting firm Poultry Perspective, said of the production cuts.
  • "This is one shoe dropping and we might see another shoe dropping," he said.
  • Pilgrim's Pride said it will take a charge of about $35 million, or 33 cents a share after taxes, for the closures, which will eliminate about 1,100 jobs, or some 2 percent of its work force. The company is looking at potential changes at other production facilities, including possible closings, with decisions likely in 30 to 60 days, Rivers said in the interview.
  • "What is happening with feed ingredient prices, escalating as much as they have over the past year and half, it is causing us to look hard at some operations where we feel we have excess product or don't have our best cost structure," he said.
  • "Part of the issue is the government continues to raise the mandate on ethanol so that we will pull another billion bushels of corn out of the system to make fuel. They don't have a policy in place in the event of a crop problem," he said.
  • U.S. government's policies encouraging ethanol production have angered livestock and meat producers, who blame those policies for the higher corn prices.
  • Based on current commodity prices, Pilgrim's Pride estimated it would cost at least an additional $1.3 billion to feed its flocks in fiscal year 2008 than it would have cost two years ago. “We simply must find ways to pass along these higher costs,” Rivers added.
  • The company said on Monday that it is also exiting the turkey business because of slim profits.

Takeaways: Rising food costs are pinching US consumer. US consumer looks for cheaper fare as substitute. Rising input costs are pinching producer. Production is cut. Which leads to higher prices down the road. Which leads to more cutting back by consumer who cannot afford these foods in same quantity - and moves to unhealthier foods to boot (cheap food is usually the least healthy). Do you see the death spiral? But don't you worry - CPI report will ignore all this (after all, ex food and energy everything is swell!) and Uncle Ben promises inflation will go away in 6 months; just trust him. And more Fed cuts coming next week. Stagflation coming to a theater near you...

Disclosure: Position: Continued disgust