Situation and Outlook of the US Chicken industry

1
Situation and Outlook of the US Chicken industry
Presented to Southern Region Agricultural
Outlook Conference Presented by
Hugues Rinfret Senior Industry
Analyst SunTrust BankSeptember 25, 2000
2
Outline

• Introduction
• Demand Conditions
• Foreign markets (exports)
• US situation
• Supply Conditions
• Breeding inventories
• Prices
• Industry Structure
• Feed costs
• Environmental issues

3
Fast Export Growth Eluding the Industry?

• Slower export flow caused re-focus on domestic
  market
• Export ratio plateau
• But huge potential remains
• Foreign incomes rising faster
• Low but rising chicken demand in foreign markets
• Focus on new products

4
Diversification of Exports Occurring Slowly

• Sales to the FSU are bouncing back
• Hong Kong is No.2 market and still gaining
• Direct exports to Mainland China still a novelty
• Need for new markets

5
Export Market Assessment

• Russia
• Political stability to support export demand
• But at risk when Russia gets its act together
• With uniform tariffs, indirect exports
  de-emphasized
• Hong Kong
• Strong economic comeback from the 1997crisis
• But re-exporting to China is booming - more with
  WTO
• Self-sufficiency in China is a dream
• Mexico
• Solid economy, offers greatest short-term
  potential
• Canada
• Profitable but mature

6
US Demand Dip but Rebound Expected

• Red meats gained in 98 99
• Strong disposable incomes
• Food service gained ground
• Diminishing health concerns
• Turning Point in 2000?
• Chicken comes back in 2001?
• Poultry relatively inexpensive
• Potential dip in consumer confidence
• New chicken products to the rescue?

7
US Supply - Breeding Inventories on the Right
Track

• Pullet Chicks placed dropped 11 in July
• Positive but delayed impact on chicken
  production
• Favorable impact on prices
• Issues
• Must contain production for several months in a
  row
• Fragmented industry supports value transfer to
  consumers

8
Chicken Prices on the Rise but...

• Breast meat posted a strong 30 gain since July
• Encouraging but careful
• Heat wave is a factor
• Consumers buying habits do not change overnight
• A look at Tyson stock price provides a glance at
  current investors perception
• Need to keep supply growth below trend
• Need successful new products

9
Industry Structure Favorable to Consolidation

• Concentration ratio relatively low in chicken
• CR-4 is 0.49 relative to 0.70 in beef and 0.57 in
  pork
• Factors keeping consolidation at bay
• Historically Fast demand growth
• Now record low feed costs
• Outlook
• Pressure to consolidate set to increase
• Slower market growth will require focus on
  product innovation
• Market for brands is limited
• Feed costs will eventually rebound
• Consolidation up the value chain (e.g.,
  retailers)

10
Steadily Low Feed Costs Behind Meat Glut

• Grain prices remain lowest in recent history
• Huge inventories keep corn well below 2.00/cwt
• Moderate export demand
• But careful, low costs...
• Encourage chicken production
• Limit current incentives for
• consolidation
• Expect flat costs in 2001
• Large inventories downplay weather risk on grain
  prices in 2001

11
Need to Address Environmental Issues

• Non-point source pollution status
• Building pressure to hold everyone accountable
• State environmental policy taking the lead
• EPA limited resources
• Grass-root movement supporting States initiative
  
• Ability to create uniform standards later
• Other livestock sectors facing similar pressure
• Chicken not at a competitive disadvantage

12
Conclusion - 2001 Outlook

• Surprising fast recovery in several export
  markets but need diversification to reduce risk
• New product development to capture the benefit of
  strong economics
• Record low feed costs again in 2001 is good, but
  put production containment at risk
• Environmental issues addressed early unlikely to
  rattle the industry