Local Poultry Producers Pinched by Rising Feed Costs

Local Poultry Producers Pinched by Rising Feed Costs

Corn and soybean prices, which are being driven up by this year’s drought, continue to impact local poultry and egg companies; ultimately, the drought is expected to drive up consumer prices.

The most severe drought in half a century devastated Midwestern crops this year and has resulted in skyrocketing prices for corn and soybeans—which translates to rising feed costs for Minnesota’s poultry and egg producers.

Poultry producers typically feed their birds corn and soybean meal, which is made from crushed soybeans. Current forecasts put this year’s U.S. corn yields at an average of 122 bushels per acre, down 17 percent from the 2011 average and the lowest yield since 1995, according to the U.S. Department of Agriculture (USDA). Soybean yields, meanwhile, are expected to average 37.8 bushels per acre, down nearly 10 percent from last year.

The drought has driven up prices of futures trading on the Chicago Board of Trade exchange. Corn for December delivery was trading at $7.36 per bushel early Monday afternoon, compared to $5.90 a year ago. Soybeans for delivery in November, meanwhile, were trading at $15.28 per bushel, up from $11.72 a year ago.

St. Cloud-based GNP Company, a privately held company that sells chicken under the Gold’n Plump brand, reported record 2011 sales of $338 million. CEO Mike Helgeson told Twin Cities Business that the company expects to boost sales by about 7 to 10 percent this year, but 2013 will be “a much bigger challenge for GNP Company and the rest of the poultry industry,” as the impact of the corn shortage becomes more pronounced.

The company expects a “tsunami of feed-cost increases coming at us and our industry for the next year,” Helgeson said. The increases will “add millions in costs that we as a company eventually need to pass on to consumers,” he added.

Poultry prices in September were up 4.8 percent year-over-year, with chicken prices up 4.5 percent and other poultry (including turkey) up 6 percent, according to the USDA, which said that poultry products are expected to be among the first to have increased consumer prices as a result of the drought.

Helgeson said his industry has been confronting rising feed costs since 2006, when a renewable fuel standard began mandating that ethanol producers use a certain amount of the nation’s corn crop. Gold’n Plump already expected a “relatively tight inventory” of corn and soybeans this year, but the issue has been “compounded with the national drought,” he said.

Helgeson supports the efforts of a bipartisan Congressional group that’s asking the Environmental Protection Agency to temporarily reduce the ethanol mandate in light of the corn shortage.

Amy Feely, feed department manager at Litchfield-based egg producer Sparboe Companies, LLC, told Twin Cities Business that the company has seen a nearly 25 percent year-over-year increase in feed costs—which comprise the company’s largest business expense.

Citing data from the Iowa Egg Industry Center, Feely said that feed costs now account for about 66 percent of the cost of producing a dozen eggs, up from 60 percent in January. Because the price that consumers pay for eggs hasn’t kept pace with the rate of feed costs, profits at companies like Sparboe are being pinched. Feely declined to disclose the private company’s revenue or profits but said that if markets stay flat, higher feed costs can be expected to cut into earnings. Sparboe is among the nation's 10 largest egg producers based on number of hens and employs about 450, according to a company spokeswoman.

“You look at all efficiencies and costs in a situation like this,” but “the feed market is nothing we can control,” Feely said. Some companies are looking to corn and soybean alternatives, such as distillers grains, a byproduct from the manufacturing of ethanol. But increased demand is also driving up the prices of those products, Feely said.

Austin-based Hormel Corporation reported $2 billion in revenue for the quarter that ended July 29, up 5 percent from the same period a year ago. Net earnings climbed about 12 percent to $112.4 million—driven in part by a 12 percent boost in operating profit from its Jennie-O Turkey segment.

Hormel spokesman Rick Williamson declined to comment on the impact of the drought, saying that the company is in a “quiet mode” leading up to its fourth-quarter earnings call in late November. But the company said in August that “increased value-added sales and an improved product mix” helped offset higher feed costs. Jennie-O’s sales rose 7 percent during the quarter.

Hormel Chairman, President, and CEO Jeffrey Ettinger said at the time that increased feed costs “will present a challenge, but the strength of our balanced business model and the vibrancy of our branded, value-added portfolio should support continued sales and earnings growth as we close out fiscal 2012.”

As evidence of how the Midwestern drought has rippled throughout the U.S. economy, The Wall Street Journal recently reported on the bankruptcy of Zacky Farms, LLC, a California poultry producer that cited soaring feed costs when filing for Chapter 11 protection.

Zacky is a relatively small poultry producer, with $146 million in sales last year, and Tom Elam, an agricultural consultant in Indianapolis, told The Wall Street Journal that smaller companies have been hit harder by the drought and soaring feed costs than larger producers, because they have less brand awareness among consumers. (To learn more about the drought’s impact on a variety of agricultural companies, read the full Wall Street Journal story here.)

While higher corn prices may be taking a toll on poultry and egg producers, Minnesota farmers are cashing in on this year’s crop. According to a report by Corn & Soybean Digest, the U.S. Department of Agriculture expects the state’s 2012 corn yield to actually be up 8 percent over 2011, although it will likely fall short of 2010’s record yield.

That means Minnesota farmers are benefitting from both higher corn prices and yields, as the state has fared better than other Midwestern states where the drought was more severe, including Iowa and Nebraska.