With no futures market to speculate on chicken-price movements, short sellers have turned to the equity market, borrowing record amounts of shares of two poultry producers that they in turn sell in anticipation of declines.
Short sellers have found a new asset to bet against: chickens.
With no futures market to speculate on chicken-price movements, they're turning to the equity market, borrowing record amounts of shares of two U.S. poultry producers that they in turn sell in anticipation of declines. The percentage of outstanding shares of Pilgrim's Pride Corp. (PPC), the second-biggest U.S. chicken producer, that were sold short by investors has soared more than six-fold since Sept. 30, while the ratio for Sanderson Farms Inc. (SAFM) has almost doubled.
The success or failure of the trade comes down largely on whether the eight-month surge in chicken, which has fattened producers' profit margins, is over or not. Prices for the whole bird have been soaring to a record, partly the result of higher beef costs that prompted consumers to turn to poultry as a cheaper protein substitute. Chicken output will expand to a record next year as lower grain prices help producers hold down costs, the U.S. Department of Agriculture estimates.
“The main issue for the lower prices is going to be because of the additional supply,” Altin Kalo, a livestock analyst with Steiner Consulting Group in Manchester, N.H., said. “It's a little bit of a guess as to how big and how explosive the growth is going to be. It's happened many times in the past where production starts to ramp up a lot faster than people expect.”
SOLD SHORT
Almost 12% of outstanding stock in Pilgrim's Pride was sold short on Nov. 24, up from less than 2% at the end of September. The company, a unit of JBS SA, is the biggest U.S. chicken producer after Tyson Foods Inc., which also sells pork and beef. Cameron Bruett, a spokesman for JBS USA, declined to comment.
Bearish bets against Sanderson Farms reached 36% this week, almost double what they were two months earlier.
While other agricultural products, including cattle, hogs, cotton and soybeans, trade on Chicago exchanges, chicken isn't quoted on any U.S. bourse, making it hard to bet on the direction of prices.
Shares of Greeley, Colo.-based Pilgrim's surged 94% this year partly as poultry prices rose. Laurel, Miss.-based Sanderson, the fourth-biggest chicken producer, is up 20%. Sanderson Farms chief financial officer Mike Cockrell declined to comment.
'PEAK' CONDITIONS
With higher chicken prices and lower feed costs, the industry has been “operating under the most advantageous conditions possible,” said Francesco Pellegrino, a New York-based analyst for Sidoti & Co., who recommends buying Sanderson Farms shares. He doesn't cover Pilgrim's Pride. Short interest has risen because investors are questioning how much longer “peak” conditions can persist, he said.
Whole chickens sold by farmers in Georgia, the biggest producing state, rose 9.4% this year to an all-time high of $1.14 a pound, which has held through much of November. A retail gauge of composite wholesale-chicken prices has climbed 24% this year to average 90.404 cents a pound in October, USDA data show.
Chicken production will climb 3% next year to an all-time high of 39.206 billion pounds, the USDA forecasts. That's at least 65% higher than estimated beef or pork output. A USDA index of chicken-feed costs was 24% lower in September than a year earlier as American farmers collect record corn and soybean crops.
Gains for demand will keep the “supply increases from crushing prices,” Heather Jones, a Richmond, Va.-based analyst for BB&T Capital Markets, said. Consumers “are going to see lower chicken prices, but nothing substantial,” she said.
Per-capita chicken consumption will rise to 85.3 pounds in 2015 from 83.4 pounds this year, the USDA estimates. The gain comes as the measure for beef is expected to decline 4.4% to 52.2 pounds. The smallest U.S. cattle herd since 1951 sent wholesale beef to a record in July, and the price is up 28% this year.
“In 2014, we have actually seen a demand shift from beef to chicken,” Donnie Smith, chief executive officer of Springdale, Ark.-based Tyson, said during an investor presentation Nov. 19. The shift, combined with increased demand from younger consumers, gives “us a lot of confidence that we're going to be chasing good demand particularly in chicken, and obviously pork as well, into the future,” he said.
MEAT INFLATION
While investors have benefited from anticipating profit-margin declines after peaks in past cycles, “these levels may be sustainable over the short-term,” Sidoti's Mr. Pellegrino said. Demand for chicken will be helped by tight supplies of other meats for the next several years, he said.
U.S. meat prices will increase as much as 4.5% in 2015, the government estimates. The gains will be lead by beef, veal and pork, forecast to climb as much as 5.5%, the most of any food group. Poultry inflation is estimated between 2.5% and 3.5%.
The USDA expects wholesale-chicken prices could drop to as low as 99 cents a pound by the third quarter next year, from an average $1.052 in 2014.
Sanderson is the fourth-most shorted stock on the Nasdaq Composite Index, which has an average short interest of 2.8%, according to data compiled by Bloomberg and Markit, a London-based provider of financial information.
Producers have placed more chickens on feed than a year ago in every week since August, according to USDA data tracking the 19 largest-producing states. Prices for soybean meal, used in poultry feed, are down 10% this year. Futures in Chicago are heading for a second straight annual loss, the longest slide since 1998.
“In this business, we say cheap feed makes cheap meat,” Thomas Elam, the president of FarmEcon in Carmel, Ind., said. “It's just a matter of how long it's going to take.”
