TSN Tyson Foods

By Matt Andrejczak

The volatile U.S. chicken industry, battered by the bankruptcy of its largest producer late last year, is piecing itself together again.

Nine months ago, oversupply, weak prices and a drop in spending by consumers at sit-down restaurants landed poultry producers in a world of hurt, made even worse by their traditional reluctance to cut production for fear of surrendering market share to competitors.

"The industry very rarely cuts production like this," Sanderson Farms Inc. (SAFM) CEO Joe Sanderson, Jr. told investors at a Stephens Inc. conference June 2. "It is a unique scenario."

Chicken producers, not known for being a well-disciplined bunch, are showing rare signs of restraint. This is helping to boost meat prices and strengthen troubled balance sheets pummeled by overproduction and high feed-grain costs.

"Producers have seemingly remained rational," BB&T analyst Heather Jones said in a recent research report.

The turnaround is coming just in time for summer barbecuing, the seasonal peak for chicken demand. While the economic downturn is still crimping sales at restaurants, consumers are buying more chicken for homemade meals, industry executives say.

There is "excellent demand for fresh chicken at retail grocery stores," Sanderson President Lampkin Butts told investors this week.

Tyson Foods Inc. (TSN) said earlier this week its chicken business is performing better than expected just a month ago. The unit, which lost $332 million in the six months ended March 28, is once again showing a profit.

With fewer birds hitting the market, prices are stabilizing.

Boneless breast meat prices, a key profit maker for producers, are averaging around $1.53 a pound, up from $1.30 in February, the companies said, citing statistics from industry tracker Urner Barry. Wings are fetching $1.32 a pound, and leg quarters are 49 cents a pound; both are selling well above their five-year averages.

Georgia Dock whole bird prices - a barometer for prices in grocery stores - are at 88 cents a pound, or 10 cents above the five-year average.

Investors have taken notice of change. Since March, shares of Tyson Foods, Sanderson, and even bankrupt Pilgrim's Pride Corp. (PGPDQ) have all surged, outpacing solid gains by the Dow Jones Industrials Average and the S&P 500 over the same period.

So far this year, Tyson is up 52%, while Sanderson is up 39%. Once a penny stock, Pilgrim's Pride is trading above $5.

Near the end of last year, producers cut output and clamped down on capital expenditures to help reverse losses. Tyson Foods shortened fixed-price delivery contracts to combat unpredictable swings for the price of corn and soybean meal, the main ingredients in chicken feed. And exports have picked up, especially to Mexico and Lithuania, which ships the chicken along to other Eastern European countries.

Another reason for optimism is the continued cutback in weekly egg sets, or fertile eggs allowed to hatch. Meanwhile, Pilgrim's Pride, reorganizing under Chapter 11 bankruptcy protection, has been idling plants while getting its books in order. Last month it repaid a $450 million bankruptcy financing loan.

Industry-wide production has been cut by 6% over the past nine months. Total pounds processed have dropped by slaughtering fewer birds and keeping them leaner.

The cutback, for instance, means Laurel, Miss.-based Sanderson will process 2% more pounds of chicken in 2009 compared with last year. In 2008, the same gain was 21%.

A Tough Lesson

Chicken producers have a lengthy history of jockeying for market share by outproducing competitors, even at the expense of profits. But last year's carnage was so severe it appears to have forced some behavior changes.

"We will continue to match supply and demand," Donnie Smith, who runs Tyson's poultry unit, said at a recent investor presentation. "We are going to take a much more long-term view of our business than perhaps we have in the past."

One thing Tyson is now focused on is selling entire birds. In the past, the Springdale, Ark.-based company concentrated more on higher-margin breast meat portions.

But there are still plenty of hurdles on the horizon. Producers could still be tripped up by a three-month spike in soybean and corn prices, which has the potential to curtail further recovery by the industry and slow momentum behind their share prices.

Since March, soybean prices quoted on the Chicago Board of Trade have jumped 45%, with the July futures contract closing in on $12.25 a bushel. Corn prices are up 20% over the same period, with the July futures contract trading around $4.50 a bushel.

Corn farmers across much of the Midwest are late planting their crop this year due to weather delays, raising concerns they could face a painful repeat of last year's feed price spike. Feed grains make up at least 50% of the cost of raising a chicken.

"We have got to pay very close attention to these commodity markets," Tyson's Smith said. "If inputs do go higher that could take the steam out of the chicken segment."

-Matt Andrejczak, 415-439-6400; AskNewswires@dowjones.com