Pilgrim's Pride Reducing Chicken Production

A couple of days ago, Pilgrim's Pride announced that it was reducing chicken production by 5%. The most interesting part isn't what the press release says, but what it doesn't say.

PITTSBURG, Texas, April 14 /PRNewswire-FirstCall/ -- Pilgrim's Pride Corp. NYSE: PPC today said it plans to reduce weekly chicken processing by approximately 5% in the second half of fiscal 2008 when compared to the same period a year ago, as part of its continuing effort to better balance supply and demand amid record-high costs for feed ingredients such as corn and soybean meal.

The reduction began with eggs set earlier this month and should take full effect with weekly processing beginning in June. The company said the reduction will remain in effect until average industry margins return to more normalized levels. The 5% reduction includes the impact of the previously announced closing of the Pilgrim's Pride plant in Siler City, NC, which should be completed by June.

"Soaring feed-ingredient costs fueled by the federal government's misguided ethanol policy has created a crisis in our industry, the true effects of which are only just now beginning to be felt by American consumers in the form of higher food prices," said Clint Rivers, president and chief executive officer. "Over the past two weeks, a growing number of smaller chicken producers have announced production cutbacks in an effort to manage these unprecedented increases for corn and soybean meal, which are expected to add billions of dollars of cost to our industry this year. It is clear that chicken producers of all sizes are feeling the tremendous financial strain from these additional grain costs. We have been encouraged by these public announcements, for they indicate that the production cutbacks this time are being shared more broadly across the industry, rather than limited to just the largest processors, as was the case last year. We believe the cuts we are enacting will strike a better balance between production and demand and strengthen our competitive position. As we have said in the past, reducing overall supply to better match demand is an important component in helping return the industry to profitability."

The company also said it is continuing to review its production facilities for potential mix changes, closure and/or consolidation in response to current negative industry fundamentals. Pilgrim's Pride acknowledged that its processing complex in El Dorado, Ark., is among those being reviewed for possible closure. But the company emphasized that no decision has been made at this time.

Although they talk in vague terms about matching supply and demand, they don't mention that there is currently a glut of chicken on the market. Just last month when they announced the closing of their Siler City, N.C. chicken processing facility they had this to say.

These actions are part of a plan to curtail losses amid record-high costs for corn, soybean meal and other feed ingredients and an oversupply of chicken in the United States.

I will happily admit that my understanding of economics is a little lacking but it seems to me that in the case of an oversupply, the fix would be to cut production regardless of what feed costs are.

And although the press release makes it sound like the El Dorado plant may be closed due to higher feed costs, an article published last week tells the real story as to why the plant is being considered for shutdown.

"We've invested millions in that facility, and there has been no return," Atkinson said. "That complex has consistently lost money, plant costs are not competitive, it hasn't been able to attract new customers, and quality and productivity are well below other similar facilities," he said.

An oversupply of chicken and unproductive facilities has nothing to do with feed costs or ethanol.