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Nov. 23 (Bloomberg) -- Near-record prices for Thanksgiving turkeys may do little to boost profit for some U.S. producers after a surge in spending on feed grain.
The average cost of corn, the primary feed ingredient, jumped 58 percent this year from 2010 and is headed for an all- time high, erasing the benefit of retail turkeys that the government says averaged $1.59 a pound this year, up 6.4 percent from last year. About 70 percent of the cost of raising each bird is feed, farmers say.
Higher spending on grain is hurting profit for processors including Hormel Foods Corp. and led Butterball LLC to announce the closure of a Colorado plant, even as the American Farm Bureau estimated turkey served at Thanksgiving meals tomorrow will be 22 percent more expensive than in 2010. Feed purchases for livestock will rise faster this year than the value of production, U.S. Department of Agriculture data show.
“Any time corn prices jump, our costs go up a lot,” said John Burkel, a fourth-generation turkey farmer in Badger, Minnesota, who raises about 2 million birds he sells to grocers including SuperValu Inc. and Safeway Inc. “We’ll see the best revenue numbers ever, but costs are so high that we’re just running more dollars through our fingers.”
Burkel estimates he will spend $1.688 million this year to generate $1.755 million in revenue, a 3.8 percent profit margin that’s down from 4.7 percent last year and below his annual goal of 8 percent to 10 percent. Burkel said he has cut his flock by about 500,000, or 20 percent, to save on feed costs that jumped about $250,000 from 2010.
Butterball, the largest U.S. producer of turkey products, said in September it will close its Longmont, Colorado, processing plant next month after feed costs it pays for farmers to supply its birds surged $65 million on average annually for five years. The company is based in Garner, North Carolina.
Hormel Foods, the maker of Spam lunch meat, increased prices and improved its operating efficiency to offset “steep” grain costs, Chief Executive Officer Jeff Ettinger said during an earnings call with investors yesterday. The Austin, Minnesota-based company anticipates “flat” profit for its turkey business next year as grain costs increase and the company raises prices, he said.
Retail prices last month, just before the seasonal peak in demand, reached $1.673 a pound, USDA data show. While that’s 0.004 cent below the monthly record of $1.677 in October 2010, it is 35 percent higher from four years ago and leaves prices this year at their highest ever on average.
“We’ve never in history seen the value of the commodity turkey as high as we are now,” said Russell Whitman, the vice president of the poultry division at commodity researcher Urner Barry in Toms River, New Jersey. “The retailer has had to shell out more dollars for the bird than ever before.”
The cost of traditional foods at a Thanksgiving dinner will jump 13 percent this year, the most in two decades, with a meal for 10 people estimated at $49.20, the American Farm Bureau Federation said on Nov. 10. Turkey was the most expensive item on the menu and had the biggest gain, with a 16-pound bird up 22 percent at $21.57.
Consumers won’t be paying record prices, because retailers sell turkeys as discounted “loss leaders” during the Thanksgiving season to bring people into the store in the hope they will buy other products, Whitman said. In November, turkeys are usually the cheapest of the year because of store promotions, said Tom Elam, the president of FarmEcon LLC, an agriculture and food-industry consultant in Carmel, Indiana.
The U.S. is the world’s largest turkey consumer, and an estimated 46 million birds will be consumed on Thanksgiving this year, according to the National Turkey Federation.
Increased sales overseas and tighter supplies also are lifting prices. U.S. exports climbed 25 percent this year, with shipments to China up 78 percent, USDA Foreign Agricultural Service data show.
After supplies and feed costs surged in 2008, causing losses for many farmers, production fell. The U.S. will produce 7 percent less turkey meat and raise 9.2 percent fewer birds compared with three years ago, USDA data show. Signs indicate that farmers are still shrinking supplies. Minnesota, the largest U.S. producer, will raise 46.5 million turkeys this year, down 1.1 percent from last year, the USDA said Sept. 23.
The price turkey farmers are “receiving at grocery stores have been higher than what it had been, so it’s been able to cover the cost for some” farmers, said Steve Olson, the executive director of the Minnesota Turkey Growers Association. “But for other guys, it depends when they bought corn, so they are losing money.”
Corn prices surged 49 percent in the past two years and this year averaged $6.87 a bushel, which would be the highest ever. Last year, the grain averaged $4.36, and in 2008, when prices surged to a record near $8, the average was $5.38. The rally in 2011 was fueled by the smallest U.S. crop in three years and a jump in use of grain to make ethanol, which will exceed feed demand for the first time ever.
“We had dramatically increased grain prices due to the demand for ethanol and the short crops,” said Paul Hill, an Ellsworth, Iowa-based turkey farmer and chairman of West Liberty Foods, a farmers cooperative in West Liberty, Iowa.
Rising costs means some farmers are “having a hard time selling for a profit, and that impacts their ability to repay loans and the ability of the banks to finance them,” said John Blanchfield, who directs the ABA Center for Agricultural and Rural Banking at the American Bankers Association in Washington.
Mike Firestine, a senior vice president at Fulton Bank in Lebanon, Pennsylvania, said last month that he denied a loan request from one of the state’s largest turkey farmers, whom he had been lending to for 25 years.
“As feed costs increase, the price they’re selling the turkeys for hasn’t increased proportionately,” Firestine said. “We, as bankers, are more hesitant to make a loan on a tighter cash flow. We need to make loans, but we have to be cautious.”
When a farmer isn’t on contract with a processor, “it makes it difficult to lend to them,” he said. “The turkey market is very volatile.”
--With assistance from Elizabeth Campbell in Chicago. Editors: Steve Stroth, Patrick McKiernan
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