Could Poultry Farming Help Solve the Food Crisis?

There’s nothing like a sharp rise in prices to make people come to their senses. Environmental groups have been trying to tell governments that our oil-fueled lifestyle was unsustainable since the 1970s, but nobody was going to pay any attention until oil hit $100 a barrel. Now we have truckers on slow-drive protests, striking oil workers holding entire economies to ransom, and commuters leaving their cars at home. Even the Americans seem to be overcoming their fondness for SUVs. 

The story is the same with food, says Morgan Stanley analyst Robert Feldman. Just as the soaring crude oil price is warning us that we need to find alternative, more efficient energy sources, global grain markets are telling us we have to eat more efficiently.

Wheat, soybean and corn have all spiraled in price as Asia has developed an appetite for meat and America diverts corn harvests to biofuel production - but this is unsustainable. At current prices, farmers can no longer afford to feed all the cows, pigs and chickens we eat. Something has to give, says Feldman – either the average country cuts its meat consumption by 43%, or there will be a lot more grief at the grocery store.

That’s why we are about to see a big shift in the world’s diet from beef and pork to chicken. Why? Because the soaring grain price doesn’t hurt chicken producers as much as it does pig and cattle farmers. Chicken is a far more efficient consumer of grain than other meats. It takes only two pounds of corn to produce a pound of chicken, as opposed to four pounds to produce the same amount of pork.

Poultry farming is also a lot less energy intensive than beef and cattle farming. That means that chicken producers don’t face nearly the same level of pressure to lift their prices as pork or beef farmers. The last time there was such a dramatic surge in grain prices, back in the early 1970s, sales of chicken soared at the supermarket as pork and beef became too expensive for the average household.

That’s not to say that chicken producers are immune to rising feed costs. Poultry companies in America have taken a pasting this year, notes Matt Andrejczak for Market Watch. Industry giant Pilgrim’s Pride (PPC) reported recently that grain prices had pushed up the cost of producing a live chicken by 65% over the past two years. The group has even shut down a chicken-processing complex and six of its 13 American distribution centers in recent months to cover costs. 

However, it’s not U.S. consumption that investors should be focusing on. The real shift will be seen in developing countries. What was once a luxury food source – before incomes rose and roads existed to transport such a delicate cargo – has now become a staple in the diet of Asia’s emerging middle class, for example. China goes through 24 billion chickens a year, compared with 600 million pigs. However, the pressure on animal feedstocks means that for meat consumption to remain sustainable over the next ten years, chicken will have to become even more popular – rising from 35% of current meat consumption to 57%, according to Morgan Stanley. That’s a huge shift by any standards. 

The main threat to chicken producers in the developing world remains disease. An outbreak of avian flu is bad news for chicken farmers – even those not directly affected are hurt by the fear it stokes among consumers. However, disease is a risk for all livestock farmers, and with chicken’s growing popularity, it would take a devastating outbreak to cause any long-term damage to demand. We look at a thriving developing market chicken producer below.  

A Mexican chicken producer that could lay you a golden egg

American chicken farmers may be struggling with feed costs. However, south of the border in Mexico, things are a little different. Chicken consumption per head is rising by 7% a year as the Mexican population has become richer over the past decade. That has seen local producers trump the big American chicken producers in their home market. Chief among these is Industrias Bachoco (NYSE:IBA). This company is the market leader in Mexico, accounting for 30% of chicken sales, and 12%-13% of egg sales.

Industrias Bachoco has a couple of big competitive advantages in its market, James Vanasek of VN Capital Management tells Value Investor. The company has an unparalleled refrigerated distribution network in the country, including warehouses and trucks. In addition, it beats the big U.S. competitors by supplying whole chickens – which Mexicans prefer to the chopped chickens that American groups Pilgrim and Tyson Foods (TSN) supply.

The firm has $300m in cash piled up for acquisitions, which puts it in a superb position to tap the ten-million-plus Mexican expatriates living in America, by buying a producer on that side of the border. The stock has been run down in recent months on fears of an outbreak of avian flu, and is now trading on a reasonable-looking forward P/E of 9.4, with a 2.3% dividend yield.

Disclosure: None

Comments

[pochovilla:]

Bypass the chicken just eat the corn.

2008 Jun 30 10:30 AM

[redbaron:]

Panchovilla, has it right. No matter how efficient your livestock operation may be, it is not as efficient as feeding the grain directly. Hog and beef are poor converters of feed to meat, and while better than hog and beef, poultry still does not convert 100%, and you have to haul both grain and bird in the process.

That brings us to transportation costs, and transportation is much of what all these analysts are missing. While working for a feed company a dozen or so years ago, the expert consultants management hired, calculated that we couldn't afford to profitably haul our products more than 75 miles, which we were surprised at, but accepted. Then they turned around and promoted selling our products internationally, and shipping it around the world. And that was when gas was $1.50, and oil was at $25-30. Imagine what it would cost to do that today.

Never the less, with todays extremely high transportation costs, transporting the product, whether finished or ingredient, is very, very expensive, and must be calculated in to any analysis.

If one could avoid transporting the corn, and feed it where it was grown, much could be saved, but then there is still the inefficient conversion of grain to meat where this discussion all started.

2008 Jun 30 11:22 AM

[blink0404:]

What a timely article. I found one similar on grain, corn, and soybeans today on greenfaucet. Very similar message with a little more analysis. Check it out: www.greenfaucet.com/co...

Also pretty good analysis of what to buy, predictions for the future.

2008 Jun 30 01:40 PM

[redbaron:]

blink0404 & Gleeson, how did your idea work out? TSN's earning came out today (7/28), and they were down 90%. Both TSN and PPC were down over a buck today, but they have much further to go before I can buy them. As I tried to point out above when this article was written, as long as corn/grain stays in this high priced range, ingredient costs are going to destroy margins for meat producers. It's a buy in the 10-11 range, and only then if corn prices have moderated some.

2008 Jul 28 10:32 PM

[Eoin Gleeson:]

Yes I agree with you redbaron on Tyson and Pilgrims - as I said in the post above - I would be very weary of investing in these now. The transportation costs is crucial as well. There is a tremendous opportunity to export pork from US to China, but its spoiled somewhat by transportation costs.

2008 Aug 05 08:56 AM

[Eoin Gleeson:]

Yes I agree with you redbaron on Tyson and Pilgrims - as I said in the post above - I would be very weary of investing in these now. The transportation costs is crucial as well. There is a tremendous opportunity to export pork from US to China, but its spoiled somewhat by transportation costs.

2008 Aug 05 08:56 AM