1

Situation and Outlook of the US Situation and Outlook of the US Chicken industry Chicken industry

Presented toPresented to : : Southern Region Agricultural Southern Region Agricultural Outlook ConferenceOutlook Conference

Presented byPresented by : : Hugues RinfretHugues RinfretSenior Industry AnalystSenior Industry AnalystSunTrust BankSunTrust Bank

September 25, 2000 September 25, 2000

2

OutlineOutline• IntroductionIntroduction

• Demand ConditionsDemand Conditions– Foreign markets (exports)Foreign markets (exports)

– US situationUS situation

• Supply ConditionsSupply Conditions– Breeding inventoriesBreeding inventories

– PricesPrices

– Industry StructureIndustry Structure

– Feed costsFeed costs

– Environmental issuesEnvironmental issues

3

Fast Export Growth Eluding the Fast Export Growth Eluding the Industry? Industry?

• Slower export flow Slower export flow caused re-focus on caused re-focus on domestic marketdomestic market– Export ratio plateauExport ratio plateau

• But huge potential But huge potential remainsremains– Foreign incomes rising Foreign incomes rising

fasterfaster

– Low but rising chicken Low but rising chicken demand in foreign marketsdemand in foreign markets

• Focus on new products Focus on new products

Chicken Production Relative to Exports

0

5

10

15

20

25

30

35

40

45

50

1987 1989 1991 1993 1995 1997 1999 2001

year

-ove

r-ye

ar %

ch

ang

e

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

US demand - left axis

exports - left axis

export-to-production ratio

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Diversification of Exports Occurring Diversification of Exports Occurring SlowlySlowly

• Sales to the FSU are Sales to the FSU are bouncing backbouncing back

• Hong Kong is No.2 Hong Kong is No.2 market and still gainingmarket and still gaining

– Direct exports to Direct exports to Mainland China still a Mainland China still a noveltynovelty

• Need for new marketsNeed for new markets

1%16%

11%

67% 25%

53%

82%

27%

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

po

un

ds

Japa

n

Mex

ico

Hong

Kong

Singap

ore

Canad

a

Russia

Latvi

aOth

er

US Chicken Exports by DestinationJuly 1999 to June 2000

Total Chicken Exports - pounds

1998/99 1999/00 % change

Russia, Latvia 1,042,493 1,706,677 64%

Hong Kong 1,182,518 1,307,536 11%

Other 2,070,766 2,325,816 12%

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Export Market AssessmentExport Market Assessment

• Russia:Russia: – Political stability to support export demandPolitical stability to support export demand

– But at risk when Russia gets its act togetherBut at risk when Russia gets its act together

– With uniform tariffs, indirect exports de-emphasizedWith uniform tariffs, indirect exports de-emphasized

• Hong Kong:Hong Kong: – Strong economic comeback from the 1997crisisStrong economic comeback from the 1997crisis

– But re-exporting to China is booming - more with WTOBut re-exporting to China is booming - more with WTO

– Self-sufficiency in China is a dreamSelf-sufficiency in China is a dream

• MexicoMexico:: – Solid economy, offers greatest short-term potentialSolid economy, offers greatest short-term potential

• CanadaCanada:: – Profitable but mature Profitable but mature

Chicken Leg Quarters (4/10)

10

15

20

25

30

35

40

J an J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec

Cents/lb.

1999 2000

US Chicken Exportspounds per month

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Jan-

98

Mar

-98

May

-98

Jul-9

8

Sep-9

8

Nov-9

8

Jan-

99

Mar

-99

May

-99

Jul-9

9

Sep-9

9

Nov-9

9

Jan-

00

Mar

-00

May

-00

FSU

Other

ruble devaluation

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US Demand Dip but Rebound Expected US Demand Dip but Rebound Expected

• Red meats gained in ‘98 & ‘99Red meats gained in ‘98 & ‘99– Strong disposable incomesStrong disposable incomes

– Food service gained groundFood service gained ground

– Diminishing health concernsDiminishing health concerns

• Turning Point in 2000?Turning Point in 2000?

• Chicken comes back in 2001?Chicken comes back in 2001?– Poultry relatively inexpensive Poultry relatively inexpensive

– Potential dip in consumer confidence Potential dip in consumer confidence

– New chicken products to the rescue?New chicken products to the rescue?

Changes in Capita Meat Consumption% change over previous year

-4

-2

0

2

4

6

8

10

1998 1999 2000 2001

beefporkchicken

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US Supply - Breeding Inventories on the US Supply - Breeding Inventories on the

Right TrackRight Track• Pullet Chicks placed dropped Pullet Chicks placed dropped

11% in July11% in July– Positive but delayed impact Positive but delayed impact

on chicken production on chicken production

– Favorable impact on pricesFavorable impact on prices

• Issues:Issues:– Must contain production for Must contain production for

several months in a rowseveral months in a row

– Fragmented industry supports Fragmented industry supports value transfer to consumers value transfer to consumers

Pullet Chicks Placed(in 000s)

6000

6500

7000

7500

8000

J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec

2000

1999

1998

8

Chicken Prices on the Rise but...Chicken Prices on the Rise but...

• Breast meat posted a strong Breast meat posted a strong 30% gain since July30% gain since July– Encouraging but careful:Encouraging but careful:

• Heat wave is a factorHeat wave is a factor

• Consumers’ buying habits do Consumers’ buying habits do not change overnightnot change overnight

• A look at Tyson stock price A look at Tyson stock price provides a glance at current provides a glance at current investors’ perception investors’ perception

– Need to keep supply growth Need to keep supply growth below trend below trend

– Need successful new productsNeed successful new products

Chicken Breast (Boneless/Skinless)

115

130

145

160

175

190

205

220

235

250

J an J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec

Cents/lb.

1999 2000

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Industry Structure Favorable to Industry Structure Favorable to ConsolidationConsolidation

• Concentration ratio relatively low in chickenConcentration ratio relatively low in chicken

– CR-4 is 0.49 relative to 0.70 in beef and 0.57 in porkCR-4 is 0.49 relative to 0.70 in beef and 0.57 in pork

• Factors keeping consolidation at bay:Factors keeping consolidation at bay:

– Historically: Fast demand growthHistorically: Fast demand growth

– Now: record low feed costsNow: record low feed costs

• Outlook: Outlook: – Pressure to consolidate set to increasePressure to consolidate set to increase

• Slower market growth will require focus on product Slower market growth will require focus on product innovationinnovation

• Market for brands is limitedMarket for brands is limited

• Feed costs will eventually reboundFeed costs will eventually rebound

• Consolidation up the value chain (e.g., retailers)Consolidation up the value chain (e.g., retailers)

0

20

40

60

80

%

beef pork chicken

Market Share of Top-Four Processors

10

Steadily Low Feed Costs Behind Meat Steadily Low Feed Costs Behind Meat Glut Glut

• Grain prices remain lowest in recent historyGrain prices remain lowest in recent history– Huge inventories keep corn well below $2.00/cwtHuge inventories keep corn well below $2.00/cwt

– Moderate export demandModerate export demand

• But careful, low costs...But careful, low costs...– Encourage chicken productionEncourage chicken production

– Limit current incentives for Limit current incentives for consolidationconsolidation

• Expect flat costs in 2001Expect flat costs in 2001– Large inventories downplay weather risk on grain Large inventories downplay weather risk on grain

prices in 2001prices in 2001

Corn (Central Illinois)

1.25

1.5

1.75

2

2.25

2.5

2.75

J an J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec

$US/Bu.

1999 2000

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Need to Address Environmental IssuesNeed to Address Environmental Issues

• Non-point source pollution status: Non-point source pollution status: – Building pressure to hold everyone accountableBuilding pressure to hold everyone accountable

• State environmental policy taking the leadState environmental policy taking the lead– EPA limited resourcesEPA limited resources

– Grass-root movement supporting States’ initiative Grass-root movement supporting States’ initiative

– Ability to create uniform standards laterAbility to create uniform standards later

• Other livestock sectors facing similar pressureOther livestock sectors facing similar pressure– Chicken not at a competitive disadvantageChicken not at a competitive disadvantage

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Conclusion - 2001 OutlookConclusion - 2001 Outlook

• Surprising fast recovery in several export markets Surprising fast recovery in several export markets but need diversification to reduce riskbut need diversification to reduce risk

• New product development to capture the benefit New product development to capture the benefit of strong economics of strong economics

• Record low feed costs again in 2001 is good, but Record low feed costs again in 2001 is good, but put production containment at riskput production containment at risk

• Environmental issues addressed early unlikely to Environmental issues addressed early unlikely to rattle the industry rattle the industry