Food inflation is taking its toll everywhere from high-end restaurants to megamarketers like Sara Lee. Higher prices for essential inputs like milk and beef (along with the weak dollar) are chopping profits and tamping down growth in consumer demand.
But there's one sector of the food world where the sky isn't falling: the chicken economy. The companies that buy, process, and peddle chicken parts are doing quite well. While many foods are getting more expensive, chicken seems to be getting cheaper. And while food fads come and go, chicken consumption has been rising consistently.
Chicken businesses are clucking about their stellar performance. Buffalo Wild Wings, a 300-store wings chain (based, naturally, in Minneapolis), pre-announced higher earnings on Jan. 10. Earnings for the quarter were projected at as much as 50 percent above expectations because sales rose smartly and because "chicken wing prices average $1.30 per pound—lower than the originally anticipated $1.40 per pound."
On Monday, Pilgrim's Pride, the self-proclaimed "undisputed number-two poultry producer in America," likewise announced an excellent quarter. Each week, Pilgrim's Pride turns about 30 million chickens into nuggets, wings, drumsticks, and sundry other parts. CEO O.B. Goolsby cited "strong performance in our prepared foods and fresh chicken businesses, lower feed ingredient costs, rising exports and strong demand in the foodservice sector."
Next week, the undisputed champion poultry producer, Tyson, will report earnings. Tyson diversified from white meat and dark meat into red meat by buying huge meatpacker IBP in 2001. But beef, the company's biggest unit by sales, is struggling with higher prices and apparently lower demand. Citing unfavorable operating margins, Tyson earlier this month temporary closed four beef plants. The company's most recent earnings release shows just where chicken stands in the pecking order. Chicken revenues rose 20 percent from the year before, while beef revenues fell. In the 12 months ended Oct. 2, 2004, chicken accounted for less than a third of sales but nearly 60 percent of total operating income. Beef, with 45 percent of total sales, contributed less than 14 percent of operating income.
Some of chicken's unlikely flight can be explained by simple economics. As beef prices remain high, chicken seems a relative bargain to consumers. And with U.S. farmers reaping bumper corn and soybean crops, the price for the primary input into chickens (feed) has been falling.
But it can also be attributed to diet trends. Chicken has increasingly become what's for dinner. According to the U.S. Poultry and Egg Association, U.S. chicken consumption per capita has risen from 68.8 pounds in 1995 to an estimated 85.6 pounds in 2004, up 24.4 percent (Here's the chart.) Meanwhile, turkey consumption has remained stagnant. And for all the hullabaloo surrounding the Atkins diet, beef consumption simply hasn't kept up. According to the U.S. Department of Agriculture, per capita beef consumption rose from a low of 64.4 pounds in 1993 to 67.5 pounds in 2002. (Go here and click "beef" on the bottom.) And according to the Cattle Beef Board, beef consumption has fallen since 2002.
Chicken's rise may have something to do with its malleability, relative healthfulness, and appeal to kids. (Beef nuggets, anyone?) Chicken, unlike other meats, tastes good when dipped into batter and dropped into vats of really hot oil. For burger joints like McDonald's and Burger King, fried chicken parts—wings, nuggets, strips, fillets, you name it—have become a significant business. KFC has no use for beef—you can't fry it.
Chicken may be benefiting from the fading appeal of the Atkins diet. Indeed, the sector of the chicken economy that is the most Atkins-friendly is struggling. A company with the unlikely name of Cal-Maine is the largest egg producer in the country. Last year, it produced 605 million dozen eggs, accounting for 13 percent of domestic consumption. Egg consumption has soared since the late 1990s, perhaps spurred by Atkins and cholesterol-fighting statins like Lipitor. Cal-Maine's stock soared along with it. In 2003, it rose more than tenfold.
But the egg bubble may have burst. Cal-Maine's stock has struggled for much of the past year. Meanwhile, thanks to the surge in demand, egg producers increased ovo-capacity. But buyers for all those eggs didn't materialize. Last December, Cal-Maine reported that its second-quarter sales fell nearly 40 percent.
For investors—at least for now—it's clear which comes first.