Over 1,000 Jobs to Go As Demand, Biofuels Spur Rise in Grain Prices

Pilgrim's Pride Corp., the nation's largest poultry producer by volume, said it is paring its chicken business and slashing more than a thousand U.S. jobs, as soaring grain prices pinch margins.

In what it is calling an industrywide "crisis," the Pittsburg, Texas, company, whose 2007 revenue was $7.6 billion, says its cost for feed is expected to be more than $1.3 billion higher than two years ago.

The increase in feed costs is due largely to rising prices for the two main feed ingredients, corn and soybeans, which have more than doubled during the past year as demand for grain world-wide rises and as more grain is used to produce biofuels.

Pilgrim's Pride plans to close one of its 37 chicken-processing plants, along with six of its 13 U.S. distribution centers.

While many farmers are enjoying the high grain prices, purchasers and users of grain, like meat processor Smithfield Foods Inc. and packaged-foods company Kellogg Co., are trimming production and seeking cheaper ingredients. Pilgrim's Pride has increased prices it charges customers, although it wouldn't say by how much.

The retail price for broiler products is about $1.69 a pound, up about 10% from last year, according to figures from the U.S. Agriculture Department. Consumers are also starting to feel the pinch of higher prices at the grocery store.

In 2006, the poultry industry was hit hard by the outbreak of bird flu overseas but then it rebounded last year after demand picked up. With a large supply of poultry on the market, the industry has been seeking ways to become more efficient.

While the higher grain costs have squeezed chicken margins, the company's announcement represents more of an "efficiency play rather than a major production cut," says Kenneth Zaslow, analyst at BMO Capital Markets. Grain likely accounts for at least 40% of the company's cost of goods sold, up from around 30% historically, he adds.

Chief Executive Clint Rivers places the blame on Congress and the government's support of the ethanol industry.

Under current law, oil-and-gasoline refiners are required to blend 36 billion gallons of ethanol into the gasoline supply by 2022. Of that, 15 billion gallons will come from corn, while the rest is supposed to come from cellulosic ethanol, which has yet to be commercialized. The ethanol industry is also supported by subsidies paid to the oil industry for blending the fuel into their gasoline stocks and a tariff to keep cheaper Brazilian ethanol out of the U.S.

Matt Hartwig, spokesman for the Renewable Fuels Association, says "to lay the blame solely at the feet of the U.S. ethanol industry is misleading at best."

Feed makes up about 50% of the cost to grow a bird, but there are other factors weighing on the industry. Higher fuel prices cut deeply into the processing side of the industry, which requires birds and meat to be transported across the country. Electricity costs are another big expense for a processing plant.

Trade groups representing the meat industry fought against the ethanol mandate, saying it would put livestock and poultry growers out of business while leading to higher food prices.

The mandate passed in Congress and President Bush signed the bill in December.

Food prices have risen more than 4% in the past year and are expected to continue climbing, according to the USDA.

At a renewable energy conference, Mr. Bush said the mounting demand for ethanol was "beginning to affect the price of food. And so we got to do something about it." He said the answer wasn't to retreat on the mandate. Instead, he said the country needed to forge ahead with research in second-generation fuels, like cellulosic ethanol.

Federal Reserve Chairman Ben Bernanke last month suggested to the Senate Banking Committee that allowing Brazilian ethanol into the U.S. without tariffs could alleviate pressure on food prices.