[caption id="attachment_13286" align="alignright" width="300" caption="Chicken farms in Delaware face an future made uncertain by the Allen Family Foods bankruptcy and other market forces."]
Delaware’s poultry industry is battling higher costs and lower revenue largely beyond its control and this may result in the failure of more processors or growers in the wake of the Allen Family Foods bankruptcy, officials and farmers said.
Allen’s June 9 bankruptcy filing has sent shock waves through the industry where many are facing the same challenges that forced the poultry producer to seek protection from its creditors.
The Seaford-based company -- which processed about 2 million birds a week and employed 2,273 people in Delaware, Maryland and North Carolina -- said it had been unable to offset sharply higher corn and soybean prices, lower chicken prices resulting from overproduction, and the recent rise in energy and gasoline costs.
The higher costs outweighed the company’s efforts to reduce expenses through measures including job and benefit cuts, production cuts, and price increases, Allen’s Vice President of Finance Brian Hildreth said in a statement to the U.S. bankruptcy court.
The 92-year-old company agreed to sell most of its assets to rival Mountaire Farms which will participate in an auction scheduled for July 25.
Officials in the industry and state government said more companies are likely to fail because of the higher corn price, which has surged on the back of higher global demand for food and biofuels, and supply that has faltered amid floods, droughts and trade barriers in some countries.
“There will be other casualties,” said Delaware Agriculture Secretary Ed Kee. “I hope and pray that they will not be here.”
Even if the Delaware poultry industry avoids further bankruptcies, it is likely to contract as a result of Allen’s collapse, Kee said.
“My feeling is that there will be a net shrinkage but my hope is that it will be minimal,” he said.
Whether the Allen bankruptcy results in a smaller industry will depend on the auction, and on bankruptcy court approval of that sale.
Mountaire is working on what to do with the Allen assets if it wins the auction but has not completed those plans, said Mike Tirrell, the company’s vice president of human resources and business services.
Asked to respond to concerns that Mountaire plans to close two of Allen’s processing plants, Tirrell said, “We don’t have any plans finalized.” He said he didn’t know if any other bidders would enter the auction.
Regardless of the outcome of the Allen bankruptcy process, Tirrell said Mountaire plans to expand its processing plants in Selbyville and Millsboro to take an extra 400,000 birds a week, and is looking for “good growers” to supply chickens to those facilities.
All poultry companies are suffering from sharply higher grain prices, Tirrell said.
“This is an extremely competitive business and when the cost of input grain goes up so much, it has a huge impact,” he said.
A major cause of the higher corn prices is rising ethanol production, which now consumes almost 40 percent of the U.S. corn crop, up from about 5 percent 10 years ago.
Corn, which accounts for around two-thirds the poultry industry’s food bill, has doubled in the last year to about $7 a bushel, well above the $5-$6 range at which the industry can make a profit, Secretary Kee said.
Corn prices, though not the only contributor to the Allen bankruptcy, were “the straw that broke the camel’s back,” he said.
At the same time, the price of soybeans – which provide protein for poultry – has almost doubled to $13 a bushel over the last four years in response to greater prosperity in developing economies worldwide, where there is a growing demand for meat and in turn feed for livestock.
Also contributing to a “perfect storm” of trouble for poultry growers is chicken prices that have fallen because of national overproduction, although there are signs that supply is beginning to ease, Kee said.
The secretary backed efforts in Congress to repeal tariffs on foreign ethanol and end tax breaks on the fuel. Although help for the fledgling ethanol industry may once have been appropriate, it now appears to be “over-stimulated” and the government assistance is no longer appropriate, he said.
At the state level, the government can help the poultry industry by expediting permit procedures and helping any new entrant to the industry understand the Delaware market, Kee said.
But the Delaware Economic Development Office recently turned down Allen’s request for a loan on the grounds that it would have been unsecured and that the company was in a precarious financial position.
[caption id="attachment_13287" align="alignleft" width="300" caption="Lewes poultry farmer Laura Hill is among those coping with the fallout of the Allen Family Foods bankruptcy and other issues facing Delaware's poultry industry"]
For poultry farmers Laura and Roland Hill, the Allen bankruptcy was a shock but it has not proved a major disruption to their business.
The Hills spent close to 20 years raising chickens for Allen Family Foods on their 2,500-acre farm near Lewes.
They were prepared for some big changes because rumors had been flying for months that Allen was looking for a buyer and had sold part of its operations to rival Amick Farms.
They didn’t expect a bankruptcy but now that it has happened, they have transferred all their business to Mountaire and the transition for their poultry business has been smooth, Laura Hill said.
“We have not skipped a beat,” she said of her poultry operation that raises batches of 120,000 chickens five times a year.
The couple and their two sons also grow corn and soybeans which have insulated them from the surging cost of poultry feed. But their grain business has been hit by Allen’s exit from the market, reducing demand for the product and the premium that poultry processors are willing to pay for it.
Laura Hill attributed the Allen bankruptcy in part to its failure to diversify into precooked products, and warned that other processors and growers that don’t offer a range of products are less likely to survive the current troubles.
“The ones who are really going to be hurt are the ones who are strictly poultry, and there are quite a few of them out there,” she said.
Mack McCary, a poultry grower near Frankford, estimated that 100 Delaware growers could fail because of reduced demand for their services in the wake of the Allen bankruptcy. “There’s a lot of capacity out there that is not going to be picked up,” he said.
McCary, who has been in the poultry business for about 40 years, said he is not immediately affected by the Allen failure because he has a pre-existing contract with Mountaire to grow batches of 250,000 chickens.
But he criticized the ethanol subsidies that have driven up corn prices. “Are we going to let people ride, or are we going to feed them?” he asked.
McCary predicted that the hardest-hit will be northern Delaware growers who have higher transportation costs than those located near processing plants in the southern part of the state, so are bearing the brunt of higher gasoline and diesel prices.
In Washington, the U.S. Senate approved measures designed to cut corn prices by increasing supply and reducing demand for ethanol.
Senators voted on June 16 to eliminate a 54-cent-a-gallon tariff on imported ethanol, mainly from Brazil, and to end a 45-cent-a-gallon tax credit paid to oil refiners for blending corn ethanol with gasoline.
But the Economic Development Revitalization Act, to which the measures were attached, failed on June 21, dimming prospects for relief from high corn prices, and drawing criticism from Delaware Senator Tom Carper.
“It is unfortunate that this amendment is a victim of the frustrating gridlock in the Senate that is blocking job-creating bills like the Economic Development Revitalization Act,” Carper said in a statement.
But he expressed hope that Congress would be able to end the tax credit later this year, or allow it to expire as planned at the end of 2011.
Carper predicted the measures will eventually become law because he said they are supported by three-quarters of the Senate and the Obama administration.
“It’s important that we not have policies in place that further raise the price of feed,” Carper said in an interview.
The Senate is also working to dismantle trade barriers in South Korea, Colombia and Panama that deter the import of U.S. poultry. A fifth of Delmarva’s chickens are exported, and the lifting of those barriers could boost the poultry industry by hundreds of millions of dollars, said Carper.
Offsetting the efforts to reduce ethanol demand, the Senate left intact a federal mandate requiring oil refiners to add a 10 percent ethanol blend to gasoline.
Bill Satterfield, executive director of Delmarva Poultry Industry (DPI), also predicted further bankruptcies in the U.S. poultry industry, and said there was little that either the federal government or a regional trade association like DPI could do about the confluence of global forces that are roiling the industry.
In addition to the higher world demand for corn, supply has been constricted by weather problems including flooding in the Mississippi valley and droughts in Texas and North Carolina, Satterfield said.
In the latest evidence of the industry’s problems nationwide, Georgia poultry processor Cagle’s Inc. said on June 20 it was laying off 300 workers because of soaring chicken feed costs.
The company partly blamed a 10 percent drop in sales of boneless chicken breasts over the past year, a problem also facing Delaware processors. Growers have bred chickens for the white meat in their breasts but now find white meat sales dropping as cash-strapped consumers opt for dark meat, which is traditionally cheaper, Satterfield said.
“This is an industry with a lot of challenges, that is facing some unprecedented situations at the same time,” said Satterfield, who has worked with DPI for 25 years.
Although poultry has always experienced economic cycles, the current slump looks especially deep. “I’m not sure I have seen the down cycle as severe as this in a long time, if ever,” he said.