How war in Ukraine affects the poultry industry

War in Europe is shocking grain, energy and financial markets in a time when U.S. consumers are already frustrated with high inflation. Nevertheless, the chicken industry should maintain profitability and avoid passing on costs to buyers.

In a WATT Poultry Chat interview, Mark Jordan, executive director of LEAP Market Analytics, broke down an optimistic, pessimistic and extreme pricing scenario caused by the war in Ukraine and explained what it could mean.

Austin Alonzo: American consumers are feeling the pinch at the pump. What is the poultry industry going to experience as the war in Ukraine expands?

Mark Jordan: Of course, when you get into these kind of volatile environments, it's hard to know exactly how this might play out. But looking at what we've seen already, and kind of doing just a little bit of sensitivity analysis, looking at what some range of possibilities might be, and what that would imply for the cost of production. I'm just going to go through a few examples here of some key input markets, and what that would do to influence cost of production, being careful to not get into a discussion of what would happen on a best case scenario or worst case, because it's really hard to know, and the outliers where this might head just looking at, well, what might happen on a little more optimistic scenario, maybe somewhat pessimistic, which is kind of the trend we've been on, and then kind of an extreme situation.

I've got a breakdown here of kind of an optimistic side of things, if it kind of cools off, we get a little bit of a normalization. A lot of these markets right now have built in something of a risk premium, and are maybe somewhat detached from the fundamentals. Of course, a lot of that is, traders, seeing where things could go and, and where the future fundamentals might be if things kind of spiral out of control. So, this assumes maybe we get a bit of calming and corn back in the low $6 area, meal back in the low $400 area, crude oil back to $100 a barrel. I've got some of the other energy markets, there is kind of how they might correlate to crude oil. Some of these costs, of course, would maybe be borne by contract growers. But I've also got built in how that payment stream might adjust how integrators might work something out. So, there's still going to be a cost there in the system. And looking at that, based on the model I use would put cost of production with those assumptions, kind of around 92 cents a pound to all-in costs. Now, that would be a decent increase over last year, around the low to mid 80 cent range. Of course, you look at the average cut out value last year, close to $1.10 a pound right now, where prices are in the mid $1.20s. So, the chicken companies would still be in pretty good shape to keep production up.

But, we'll look at this next slide, a more pessimistic scenario. We're kind of more leaning in this direction, we've kind of been splitting the difference between the two right now. But, we look at a situation where corn goes to $8. Meal at $500 a ton, oil 150, you can see some of the other input categories. Now, we start seeing a more pronounced increase in inputs. Now, what's interesting is, still given where chicken prices are, there would be a little bit of profit margin left. Chicken prices are just that high. So pessimistically, you know, this is starting to put a huge squeeze, obviously. But, you know, the industry just kind of also reflects what kind of a cushion how strong chicken demand has been. But chicken demand is showing signs of wavering just a little bit.

Now I want to look here to finished up with this kind of more extreme scenario. Some of the numbers I've seen, if this thing kind of spirals out of control. Of course, it's really hard to pin down where that could be. And now you start talking about cost of production $1.30 $1.40, $1.50 a pound and that would certainly put integrators underwater and create huge pain in the industry and ripple through all the way out to the consumer. So, there's certainly the potential here for some for some pain throughout the system.

Learn more from Jordan at Chicken Marketing Summit

Jordan will discuss how key macroeconomic forces – including soaring inflation, a chaotic labor market and sweeping demographic changes are expected to influence poultry demand as well as competing protein markets in the U.S. and around the the 2022 edition of Chicken Marketing Summit.

Make plans to attend the 2022 edition of Chicken Marketing Summit scheduled for July 25-27, 2022 at the Château Élan in Braselton, Georgia. Registration is now open with early savings available.

Par : Austin Alonzo (11/03/2022)

Source :

Photo :