The need to restrain production 19 Jul 2006

The recent decline in export demand for processed portions, whole birds and leg quarters has created an oversupply situation in the markets of both Brazil and the USA.


Concern over avian influenza in the countries importing frozen products has necessitated cutbacks in placement. In Brazil, complexes dedicated to export have been seriously impacted since these units were designed and structured to supply specific markets in the Middle East and more recently Russia. The downturn in demand has resulted in closure of plants and consolidation of production to restore the balance between production and sales.


The situation in the USA is more complex since a large number of plants, perhaps as many as 80, are involved in export of leg quarters. This means that this product has to be released to the domestic market, lowering the revenue from both dark and white meat. Alternatively leg quarters have to be exported at ever decreasing unit cost. Facing the reality of soft markets the major US integrators are reducing output.


Both Tyson Foods and Pilgrim's Pride have announced cut-backs in response to increased storage costs and suboptimal shipments. The response by broiler integrators in both Brazil and the USA is a rational response to disequilibrium between supply and demand.


Contrast the situation in the US egg industry. History has shown that producers of generic shell-eggs make money only two years out of five with a breakeven or loss in the intervening years. Data for the first five months of 2006 shows a loss of 7 cents/dozen consistent with ex-farm revenue of 36 cents/dozen and a current cost of production in the region of 42 cents/dozen. This differential represents a loss of 73 cents/hen during the first half of 2006.


Has this situation resulted in cutbacks? Statistics compiled by the USDA show continued expansion, retention of flocks through their second cycle of production and little reduction in the volume of replacement pullets. Industry observers maintain that there are 3 to 4 million excess hens in the national flock. If these hens were removed from production by attrition and depletion, unit realization would be enhanced to a level which would restore profitability.


Unfortunately the US egg industry operates on the principle of "don't cut him and don't cut me, cut the guy behind the tree".


Ultimately losses cannot be sustained as producers deplete working capital. Low prices it is said "cure low prices". Would that the US egg producers realize their collective folly and follow the dictates of reality and impose self-restraint in production. The example set by the broiler industry represents a model to be emulated.


By: Simon Shane