Restaurant chains enjoy falling chicken prices

The biggest-ever U.S. corn harvest is spurring poultry farms to expand chicken production, sending domestic supplies of the meat to a record and cutting costs for buyers from Costco Wholesale Corp. (COST) to McDonald’s Corp. (MCD)

Corn fell 50 percent from its peak during last year’s U.S. drought, boosting profit for Tyson Foods Inc. (TSN) and other poultry producers and expanding supplies of broiler meat the government says will reach a record this year and next. Wholesale prices will drop 7.1 percent to 92 cents a pound in 2014, according to the median of seven analyst estimates compiled by Bloomberg.

Chicken companies increased egg production in six of the first seven months this year, government data show. Processors are earning 5 cents a pound compared with losses of 4 cents to 5 cents a year earlier, the National Chicken Council said. More birds mean lower costs for Costco and McDonald’s, and expanding supply may help extend the drop in global food costs that the United Nations says reached a three-year low in September.

“We’re seeing relief with the improved crop this year,” said Michael Helgeson, the chief executive officer of St. Cloud, Minnesota-based GNP Co., founded by his grandfather in 1926. GNP uses 9 million bushels (228,600 metric tons) of corn a year, a major expense in raising more than 104 million birds, he said.

The wholesale price for U.S. broilers, or young chickens suitable for cooking, will average 98 cents to $1 a pound this year, as much as 15 percent higher than in 2012, the government estimates. The Standard & Poor’s GSCI Index of 24 commodities is down 5.6 percent this year, led by a 39 percent drop in corn.

Egg Laying

There was an average of 345.5 million egg-laying hens in September, 2 percent more than a year earlier, U.S. Department of Agriculture data show. Production of meat from broilers will rise 2.1 percent to a record 37.809 billion pounds this year and 2.5 percent to 38.75 billion pounds in 2014, the USDA says.

Feed including corn makes up about 68 percent of the costs of raising a live bird, according to Tom Elam, president of FarmEcon LLC, an agriculture and food-industry consultant in Carmel, Indiana. While that’s less than the 72 percent cost for hogs and as much as 85 percent for cattle, poultry farmers can move more quickly to expand production.

It takes as few as eight to 10 weeks from the time an egg is laid until the bird enters the processing plant. That means a farmer can add more hens and expand production in about six months, Elam said. Boosting output takes about a year for hogs and about three years for cattle.

Worst Drought

U.S. farmers are collecting a record corn crop of 13.843 billion bushels this year, 28 percent more than in 2012, when the worst drought since the 1930s cut output and sent prices on the Chicago Board of Trade to an all-time high of $8.49 a bushel in August 2012. The grain fell 0.2 percent to settle at $4.2625 today.

Processors slaughtered 705.7 million chickens in September, 4.5 percent more than a year earlier, and birds on average weighed 5.95 pounds, a gain of 1.2 percent, the USDA said in a report on Oct. 24.

Restaurants will pay 5 percent to 10 percent less for chicken next year, said David Maloni, the president of the American Restaurant Association Inc. in Sarasota, Florida. The decline may be curbed by rising demand as consumers seek a cheaper alternative to beef and as restaurants add more chicken to their menus, he said.

McDonald’s, the world’s largest restaurant chain, started serving bone-in “Mighty Wings,” Burger King Worldwide Inc. (BKW) introduced buffalo chicken strips, and Wendy’s Co. is offering a chicken sandwich on a pretzel bun. Yum! Brands Inc. (YUM)’s Chief Executive Officer David Novak said on an Oct. 9 earnings call that Pizza Hut will increase marketing of chicken strips and wings next year.

Dry Pastures

Whole chickens averaged $1.528 a pound at U.S. grocery stores in September, the most this year, while boneless round steaks averaged $4.874 a pound, 3.1 percent more than a year earlier, Bureau of Labor data show. U.S. beef output will drop 5.7 percent to 24.150 billion pounds next year, the lowest since 1993, after the drought dried up pastures and cattle producers culled herds in response to rising feed costs, USDA data show.

Tyson, the largest U.S. meat processor, will buy extra meat rather than expand output, Chief Executive Officer Donald Smith said on an Aug. 5 earnings conference call with analysts. Rising demand and lower feed costs contributed to record profit for the Springdale, Arkansas-based company’s chicken unit in the three months through June 29.

Commodity Costs

Cheaper birds will provide “margin relief” on the $4.99 rotisserie chicken at Costco, the largest U.S. warehouse-club chain, Chief Financial Officer Richard Galanti said on a conference call with analysts Oct. 9. The Issaquah, Washington-based company sells more than 60 million chickens a year, generating $300 million in revenue.

Chicken, beef and bacon had the biggest impact on commodity costs for Oak Brook, Illinois-based McDonald’s, “partly offset by some of the lower grain costs,” CFO Peter Bensen said on an Oct. 21 conference call to discuss third-quarter earnings.

Increased supplies of chicken wings helped lower costs and boost third-quarter earnings for Buffalo Wild Wings Inc. (BWLD), a Minneapolis-based restaurant chain with almost 1,000 stores. There is “plenty of supply out there,” CFO Mary Twinem said Oct. 29 on a conference call with analysts to discuss third-quarter earnings.

Fieldale Farms Corp. in northeast Georgia is paying $4 million less a month compared with a year earlier for its weekly chickenfeed ration of 400,000 bushels of corn.

“All of our competitors are expanding a little bit here and there,” said Tom Hensley, the president of Fieldale, which produces 3 million chickens a week. “But it all adds up when you put the big picture together.”