Article: COVID-19 bringing shifts in poultry sector

Read below an article taken from our commodities platform dated 07/04/20.

Highlights

Whole bird prices retreat 17 US cents per pound - the largest decline on record as food service movement implodes.

Both boneless/skinless breast meat and wings see swift price declines as sweeping food service support declines cause sellers to creatively seek clearance alternatives.

Broiler Overview & Comments

As consumers have adopted stay-in-place measures over the last two weeks, the market place has varied widely, depending on procurement activity. Food service support has eroded significantly as store traffic has been decimated. Nearby, supply lines will be tested as additional broiler meat production shifts to accommodate retail-orientated product. As more integrators revise targeted liveweights to focus on retail demand, there is a growing notion of surplus reoccurring over the next several weeks and months. Wings and dark meat have led the cutout valuation higher over the last 12 months. IEG Vantage anticipated that the cutout would be less reliant on wings for 2020, but the price erosion as a result of elevated production now has been further exacerbated on weak demand as many spectator events associated with social gatherings and wing consumption either have been canceled or delayed due to social distancing measures. During March, IEG Vantage's weighted broiler cutout valuation averaged 77.4 cents per pound, which was down 10 percent from a year earlier. It is not surprising that the March average was lower than a year earlier given the externalities facing the industry. Neither was it surprising that the weighted average was down 1.3 percent from the previous month. But it is worth noting that it was the first time since 2015 when prices declined overall from February to March. IEG Vantage anticipates broiler integrator margins were slightly above breakeven during March, overall. While the current broiler meat price outlook and nearby corn and soybean meal prices suggest an opportunity for margins to remain above breakeven for 2020 on average, there remains much consternation to the effect that declining food service demand can continue to pressure markets beyond the scope of the fundamental price forecast. With integrators not showing any reluctance to advance supplies through mid-year, risk is continuing to develop for margin compression to be more severe than IEG Vantage's previous outlook (shown in the following graphic) as a result of surplus availability during the second and third quarters.

Turkey Comments

The Impact of COVID-19 stay-in-place measures on the turkey industry is most notable in the further processed segment where significant declines in protein usage due to reduced food-away-from-home consumption has occurred for in-store dining locations. The further processed segment has represented more of a year-round revenue center for turkey producers in an otherwise seasonal center-of-plate offering. Declining use further exacerbates price pressure in segments that already were on their heels through much of the first quarter. Nearby, there remains considerable risk when assessing the outlook. Much like the more expensive beef cuts, turkey breast meat typically destined for the premium deli counter is expected to encounter significant demand shock as consumers are less likely to visit local delicatessens or their full-service deli counter at retail (even if they are open). Conversely, tub, or pouch lunch meat is expected to see a brief period of support, which could remain prolonged as consumers search for economical options to feed the entire family during stay-at-home orders. It is yet to be seen whether the result of a rebirth of demand at wall deli meat section will prove supportive overall to the cutout valuation. In the most recent USDA Cold Storage report, turkey in freezers at the end of February totaled 341 million pounds, which was down 25 percent from a year earlier and down 11 percent when compared with the average for February during the most recent five years, yet up 13 percent from January's end. The disparity from a year earlier can be owed to whole bird supplies as nearly all other categories showed growth during February. Whole birds reported at year's end during 2019 were at a significant deficit when compared with a year earlier. Inventories of whole birds rose at a dampened rate during January and February. Alternatively, breast meat inventories grew by 11 percent during February, despite being at a level still 17-percent below a year earlier to end February. In addition, turkey meat categorized as "other" rose 17 percent during February. With fresh market prices dropping to the levels they have been, current conditions easily could be seen by some market participants as an opportunity for forward purchasing, which is expected to result in further building of stocks nearby.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.