Smart Investing Daily – A Chicken’s Story

Jared Levy, Editor, Smart Investing Daily
Tuesday, 10 May 2011

There are so many sides to the global food story, but the chicken industry could be a novel all by itself.

It’s a tough sector to understand, let alone invest your hard-earned dollars in. Hopefully this clears the “coop” on our wonderful feathered friend the chicken.

King Chicken

The chicken industry has two basic groups of chickens. “Broilers” (horrible name, I know) are the ones you will find whole or in parts at your supermarket. They are bred to be super large and full of meat; most are Cornish/Plymouth Rock hybrids.

Egg-laying chickens are quite different and are typically White Leghorns (pronounced “leggerns”), Golden Comets and Red Sex Links, among others.

According to the USDA, the U.S. poultry industry (chicken and turkey) is the world’s largest producer and second-largest exporter of poultry meat. We also are a major egg producer.

About 20% of the chicken products produced here in the States are exported, so a weaker U.S. dollar means better prices for chicken farmers here in the U.S.

We eat more poultry than beef or pork alone, but less than all red meat combined, so poultry is a big deal. It’s not only a big deal here, but around the world.

Globally, the average wholesale price of a broiler climbed 29% from 64.4 cents per pound in 2006 to 83 cents at the end of 2010. But something is afoul in the world of chickens.

In a report on April 14, 2011, the USDA said that chicken prices will average about 84 cents for the year. With recent weather catastrophes and continuing changes in demand, that number should be higher. Yet, chicken prices have actually gone soft.

In fact, the price of broilers was down to less than 78 cents in the first quarter of 2011. Stranger yet, beef prices, especially prime cuts, have remained strong.

Not Just About the Bird

Tyson Foods (TSN:NYSE), one of the U.S.’s largest chicken producers, told investors that higher corn and wheat prices are jacking up the cost of feed. As a result, the company warned of weaker profits.

It also said its weak earnings forecast was because gasoline, energy and other food prices were eating into consumer’s budgets. This price weakness was also noted in the USDA report I told you about.

Remember that Tyson and most major producers focus on non-organic poultry, which is what most people eat. Organic/free-range chickens can cost more than three times as much.

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Is Chicken the New Canary?

Chicken is an affordable (but still tasty) alternative to red meats. And without the skin, the fat content is normally lower. Non-organic chicken is a staple of the middle class, and it can be used as a gauge of consumer strength (of course, combined with other indicators).

Here’s what’s interesting…

Even though regular chicken is facing downward pressure on prices, Chipotle (CMG:NYSE) said it was experiencing a major shortage of “natural” chicken. Is this good news for Tyson? Not so fast!

Natural chicken supposedly falls right between regular chicken and fully organic chicken. It’s slightly higher in price than regular farm chicken and contains no additives or antibiotics.

What’s “unnatural” about “natural” chicken is that the FDA does not set any guidelines for what that word means in the real world. The USDA states that it’s a product containing no artificial ingredients or added color and is only minimally processed.

The bottom line is that it costs more than regular chicken. Truly organic chicken costs even more.

I bring this up because Tyson is struggling with lower demand and lower chicken prices; yet there is a shortage of natural, high-end chicken. This tells me that growth is in the upper class, not with the common folks. High-priced, organic grocers like Whole Foods Market (WFM:NASDAQ) are making record profits, which again points to a very healthy upper class.

Chicken production is a tough business to be in, but tracking demand and prices can speak volumes about the health of the consumer.

I believe we can expect the top-shelf products to stay in demand.

As for our friend the chicken, I would stay away from Tyson Foods for now and stick with high-end resellers like Whole Foods and the natural, organic food distributors like Hain Celestial Group (HAIN:NASDAQ). These guys offer higher-priced, quality goods to people who are more than happy to pay for them.

Editor’s Note: Right now, the globe faces a common threat that’s nearing fruition — a food shortage disaster.

There’s little governments can do to prevent this crisis. Analysts say it’s a greater threat than rising oil prices. What can you do to protect your wealth, your family, and even profit during this chaos? Get all the details from Taipan’s Safe Haven Investor.

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