Contract poultry growers north of US 301 in Kent and Queen Anne’s Counties could face serious challenges to their livelihood if Purdue and Mountaire Farms decide to consolidate their production chain closer to their processing plants – leaving many local contract growers with empty chicken houses.
With the rising cost of feed and the high cost of transportation, big producers are looking to streamline their transportation routes on the Shore in an increasingly competitive market that has driven the profit margin of poultry to an all-time low. Industry leaders are looking to make supply adjustments to raise the price of poultry. While pork and beef prices have risen with feed prices, poultry prices have remained relatively flat.
The move to consolidate geographically comes on the heels of a June bankruptcy filing by Allen’s Family Foods of Seaford, Delaware. High feed prices played a large role in Allen’s downfall — as the price of feed grain tripled between 2006 and 2011.
Regional growers and poultry workers are waiting to see if a buy offer from Allen’s rival, Mountaire Farms, is approved by a bankruptcy court, which could mean business for independent growers could continue without much interruption, and 500 layoffs at the Cordova processing plant could be avoided. Allen’s is one of the top three employers in Talbot County and the loss of those jobs could spike the unemployment rate in Talbot from seven to 10 percent.
The bankruptcy court has set an auction date for Allen’s assets for July 28.
Maryland Delegate Jay Jacobs (R36) said that there is room for more competition in the Eastern Shore’s poultry industry.
“My intention is to talk to the Governor and see if anything could be developed from his recent trip to China and Korea to open up markets for our poultry industry,” Jacobs said. “There could be some efforts made through the [Department of Business and Economic Development] to push that forward now.”
Independent poultry grower, Jennifer Rhodes of Deerfield Farms in Queen Anne’s County, has raised flocks for Allen’s for almost 25 years. She is concerned that her poultry houses could be geographically edged out of the production chains of Purdue and Mountaire because she is north of 301.
“We don’t know the outcome of the [bankruptcy], it’s beyond our control,” Rhodes said. “Right now there is no other company that will take me on. When we talked to them they said they would put us on a list… [Purdue and Mountaire] don’t want to cross 301; they want to be in a certain mileage from the plants.”
Allen Davis of Galena, a sixth generation farmer in Kent County, has grown chickens for Allen’s for 17 years and shares the same concerns as Rhodes.
“We are pretty much in the same situation Jenny is,” Davis said. “Technically, we’re not above US 301, but we are probably the furthest north from any of the producers.”
Davis says being a grain and a poultry grower can be the best and worst of both worlds.
“The whole economy for poultry production is stressed…feed prices are at record highs. And while I’m a grain farmer as much as I’m a poultry grower, I am concerned about the end user paying the [high feed] bills…I imagine there are as many [poultry producers] operating in the red as there are operating in the black,” Davis said. “The largest element of fear in our operation is that the poultry industry is not looking to increase production when they’re losing money…it’s very easy for them to scale back, and that would include us… we wouldn’t have a company to grow for.”
But Davis is optimistic that geographical considerations will not be the only factor in how big producers choose their growers.
“When they open the area up here again and decide to take on more capacity, they’re going to look at the record of the growers; they keep a very close record of how efficient you are at producing chickens,” Davis said. “We have pretty good numbers, and we have a well maintained farm. We recently updated our [chicken houses], so I have no choice but to feel optimistic.”
The main culprit to rising feed costs has been the growing demand for corn to supply the rising federal ethanol mandates, which come with lucrative taxpayer subsidies for the oil and gas industry to blend ethanol with conventional gas. It is estimated that nearly 40 percent of the 2011 harvest will go to ethanol producers in a year that is expected to see production fall due to drought in many corn producing states.
The US Senate voted on June 16 to end ethanol subsidies to gas producers. After the 73-27 vote, Senator Ben Cardin said ending the subsidy was necessary to help the ailing poultry industry and save the taxpayer an estimated $6 billion annually.
“America needs to invest in alternative fuels that will not negatively impact our food supply. More than one-third of our nation’s corn is now going into the production of ethanol,” Cardin said in a press release from his website. “This increased demand for corn is raising the price of everything from eggs, to milk, to soft drinks, to chicken, to breakfast cereals, and it’s the American consumer who is hit hardest with higher food bills. I have heard loud and clear for Maryland’s poultry industry that this subsidy hurts their operations and places Eastern Shore farm jobs at-risk. Ending the tax credit for ethanol should help stabilize prices and provide a much-needed boost for consumers and families nationwide.”
But Cardin only got it half right, according to Mary Colville, Director of Government Relations for the National Chicken Council.
While the bill would save the taxpayer $6 billion annually, it wouldn’t go far enough to reduce high feed costs and the rising cost of food at the grocery store,” Colville told the Spy. “The vote is merely a symbolic gesture. The demand for corn will not fall as a result of ending the subsidy unless we amend the Renewable Fuels Standard [mandates].”
The RFS was established under George W. Bush in 2005 as the renewable fuel volume mandate in the United States, which required refineries to blend 9 billion gallons of renewable fuel (ethanol) into gasoline by the end of 2012. The mandate was increased in 2007 to 12.5 billion gallons by the end of 2012.
Former National Chicken Council Chairman and Harrison Poultry CEO Mike Welch lamented to the Senate Agriculture Committee in June that the price of feed grain had more than tripled since 2006 from $2/bushel to nearly $8, and he blamed the RFS mandates.
“Animal agriculture is experiencing major disruptions while ethanol producers continue to outbid non-subsidized buyers of corn. The National Chicken Council recommends a plan be implemented that would assure the [ethanol subsidy] be sunseted at the end of 2011 and that the Renewable Fuels Standard be adjusted when the stocks [of corn] drop to low levels which is the situation we now face in ,” Welch told the committee. “Government policy for corn-based ethanol that subsidizes, mandates, and protects it from competition has significantly changed how ethanol reacts to normal market forces and how it is put to the head of the line when competing for corn. This bio-fuel demand for corn is a new dynamic that changes essentially all relevant econometric models. Corn used for ethanol for the 2005/06-crop year was 1.6 billion bushels or 14 percent of total usage. For 2011/12 USDA is estimating over 5 billion bushels or more than 38 percent of this Fall’s estimated corn harvest [will go to ethanol production].”
Purdue Corporate Communications Manager Joe Forsthoffer said that domestic corn stocks are at an all time low for other reasons besides the ethanol mandates.
“Ethanol is a significant factor, but we’re also seeing more global demand for proteins in developing economies, which means they’re purchasing more grains,” Forsthoffer told the Spy. “Add increased global demand to a weak US dollar and exports become more favorable to other countries.”
Forsthoffer said the poultry industry is going to have to make production and supply adjustments to survive because the current trends are not profitable.
“You have an inverse happening where feed costs are reaching unprecedented highs and the price of chicken is at an all-time low,” said Forsthoffer. “The difference between this and other highs in the past is the amount of time feed prices have stayed high. We’ve seen peaks before, but this seems to be a new plateau. So you have a plateau of higher feed prices and a plateau of lower chicken prices…the industry as a whole is losing money.”
“Eventually there’s going to have to be some rationalization to the supply [of poultry].” Forsthoffer said. “The industry is starting to cut back a little bit, and we’ve been putting a lot more emphasis on moving product higher up the value chain…value added products have more stable pricing and are not as tied to the commodities markets.”
Davis agreed that ethanol could not be blamed solely for the high price and low stockpiles of corn. He cited global weather conditions and India and China’s growing appetite for meat.
“You have different market elements like ethanol that are certainly in the mix,” Davis said. “But short grain supplies around the world are due to production problems [from drought] and the increase in demand that is huge…I’m pretty certain these levels of grain prices are probably here for a while.”
Davis said that getting a new producer in Maryland should involve cooperation from the Maryland Department of Agriculture in reducing red tape in the application and permitting process.
“With all the regulations the state throws in front of this industry, it would help if the state could just streamline the process so we’re not out of production too long, and companies don’t get scared away,” Davis said. “If [Maryland] could just smooth the regulations and the hurdles these companies have to jump over, they could be up and running quicker.”
Forsthhoffer said that Purdue has no ironclad boundaries for choosing local growers.
“Of course you want to keep your growers close to the plants, but it will be on an individual basis with a producer in determining what our needs are at the time, and which plant needs producers,” Forsthoffer said. “As each producer calls us, we will evaluate that situation.”
Rhodes believes that the industry and her farm will survive the current trends.
“I’m going to be very enginuative, and we’re going to find something to grow in those houses, and we’re going to keep farming,” Rhodes said. “We love farming, and my succession plan is for my sons to take over the farm. Capitalism does work, and I’m pretty confident in the poultry industry.”