All things considered: June 2011

The outlook for Canadian poultry farmers really shouldn’t be this rosy. Corn and soybean prices are way up and expected to stay there. Prices for alternatives to corn and soy are also up.

These surging prices and tight supplies are squeezing U.S. and European livestock farmers and slowing recovery for hog and cattle farmers. In theory, the high prices, tight supplies of feed, increased competition from ethanol as well as volatile weather should be pressuring poultry farmers.

But that is far from the case. Consumer demand for chicken continues to increase, egg consumption remains solid and turkey seems to be recovering along with the Canadian economy.

The result is that, according to Agriculture and Agri-Food Canada (AAFC), the average Canadian poultry and egg farm is expected to earn $162,478 in net operating income in 2011. This is 36 per cent higher than the 2005-2009 average and about 10 per cent more than in 2010. Egg production is expected to increase by two per cent, as the average rate of lay increases, according to AAFC.

In addition to setting Canadian poultry producers apart from other Canadian livestock farmers, this also distinguishes them from poultry producers elsewhere. For example the Irish Times recently ran a screaming headline and story on the decline, and perhaps impending demise, of the Irish broiler industry in the face of low price imports.

In the United Kingdom, the inability to pass higher costs and prices through to consumers is straining the industry.

The market research firm Plimsoll recently reported: “Whether it’s fuel, materials or wage demands, every company in the U.K. poultry industry is being squeezed. Sixty per cent of companies have seen their gross margin fall in the latest year,” said report author, David Pattison.

Although the majority of poultry companies in the U.K. remain profitable, Pattison said that over the past two years the average profit margin in poultry had fallen to three per cent, with 216 companies losing money.

In the U.S., Paul Downes, president of Mountaire, a Delaware-based poultry company, said the industry faces a price-supply squeeze. “The only way to higher prices is less supply,” he said in a published report. “The only way to less supply is chicken companies will shut down or cut back. That’s not good for poultry growers or the economy. But I think that’s what we’re going to see.”

It seems there is a need in parts of the U.S. to manage supply or impose supply management in a rather ad hoc way to ensure that prices can cover costs.

Meanwhile in Canada, supply management blunts the impact of rapidly rising feed costs. These costs (largely corn) are expected to increase by 25 per cent in Canada this year. That forecast is based on the prospects of an average harvest in Canada and expected increases in corn production in the U.S. Offsetting feed prices are a 10 to 15 per cent increase in chicken prices. The result is that market receipts for the average chicken farm are forecast to rise by 13 per cent this year from those in 2010.

The average poultry and egg farm earned about $147,000 in net operating income in 2010. This was 23 per cent higher than the 2005-2009 average.

These expectations for rising incomes for poultry and egg producers in 2011 sets them apart from Canadian agriculture as a whole. After improved returns in 2010, forecasts indicate that farm income for sectors other than poultry and eggs will decline because of increased operating costs and reduced government program payments. Rising costs and dropping government support more than offset expected increases in crop and livestock receipts.

The breakdown is as follows. Crop receipts are expected to be up slightly as the price increases in grains and oilseeds that occurred in the second half of 2010 continue in 2011. But crop production expenses are increasing in 2011. Costs for fertilizer, seeds and pesticide are all expected to rise, and volumes purchased will increase as unseeded/flooded acres on the Prairies are put back into production and farmers push to increase yields. Meanwhile, government program payments will decrease.

Net cash income and average net operating income are forecast to drop by 13 per cent and 11 per cent, respectively.

Cattle and hog receipts are also forecast to be higher in 2011 as they continue to recover from 2009 lows. But those increased prices won’t offset the impact of higher feed costs, a higher dollar and country of origin labelling in the U.S. As a result, net incomes of red meat producers will go down.

Net operating income for the average cattle farm is forecast at $11,608 in 2010 less than seven per cent of the forecast income of poultry farmers. Net operating income for the average dairy farm is expected to be $111,322 in 2010, about 75 per cent of poultry income. These income forecasts and estimates indicate that for poultry producers these are among the best of times.