Soaring Corn Prices Impact Meat Production

MATTHEW ENIS

NEW YORK — The soaring price of corn will present a major challenge for pork, chicken and beef producers for at least the next five years, leading to sustained increases in wholesale and retail prices, reduced production and flattened U.S. per capita consumption of meats in the foreseeable future, analysts predicted in a conference call hosted by Wachovia Capital Markets last week.

The price of corn, which animal producers use as a primary feed source, has doubled from $2 to $4 per bushel in less than a year. This increase has been driven almost entirely by new demand from the budding ethanol industry, which currently offers corn producers significant subsidies due to the U.S. government's ongoing renewable fuels initiatives.

“In the past, when we've had a high corn price situation it's been due to a supply problem — that is, a crop was short due to a drought or growing conditions,” explained Bill Roenigk, chief economist for the National Chicken Council. “This time it's totally different. This unprecedented — and I think we can say unprecedented — run-up in corn prices is driven by demand, pretty much all due to ethanol.”

Storage inventories of corn were drawn down by more than half last year, and Roenigk said relief does not appear to be in sight. About 13 billion bushels of corn would need to be harvested this year, he estimated, to satisfy demand and bring prices back to $3 per bushel, a feat that would require an additional 14 million acres to be planted in 2007. As prices have risen, many farmers have announced their intent to plant more acres this year and profit from the increase. But the most optimistic projections for total additional acreage currently top out at around 10 million.

“It's most likely impossible,” he said. “Which means someone is going to be without corn.”

The pork and chicken industries will be hardest hit if corn prices remain high, since unlike beef suppliers, pork and chicken producers cannot resort to pasture forage, hay or distiller grain as feed alternatives.

The wholesale price of chicken rose this winter to cover these added costs, Roenigk said, with boneless, skinless breasts at $1.50 per pound, wings at $1.40 and leg quarters at 40 cents — prices typically seen in mid-summer, when demand is peaking.

Producers are facing significant risks going forward, since a drought or other weather-related event could reduce projected corn crop yields this summer, forcing feed prices even higher.

“With these corn prices, as [producers] look ahead, they're going to be more cautious about putting more birds in the field if they don't have corn locked in at pretty good prices,” said Roenigk.

These factors will likely cause production and, as a result, per capita consumption to flatten until feed prices stabilize and costs are passed through to consumers.

From 1970 through 2006, U.S. chicken production grew at an average annual rate of 4.4%, according to data from the U.S. Department of Agriculture and NCC. By contrast, USDA is projecting a much more modest 0.8% increase in production for 2007.

“We should be able to continue production at the level that we have now, but I don't see the ability to really grow at the 4% or 5% rate that we've done historically,” said Roenigk.

“We have a new situation with respect to ethanol,” he explained. “It really has changed the world for us, and I think that it will continue to change the world for the next five years, if not 10 years, until this sorts itself out.”

The NCC, as well as other groups in the beef and pork industries, has been lobbying Congress to adopt a more measured pace for renewable fuel initiatives to allow corn production to keep pace with that industry's growth.

Roenigk's presentation was hosted by Jonathan Feeney, equity analyst, food and beverage; Jeff Omohundro, equity analyst, restaurants; and Bryan Hunt, high yield analyst, food and beverage, for Wachovia Capital Markets.