Pilgrim’s adopts cost-based
pricing of chicken

ith feed-ingredient costs ranging near historic highs and chicken companies unable to pass those costs along to consumers, the industry’s business model is broken and needs fixing, said the chief executive of the nation’s second-largest chicken company where cost-based pricing of chicken is part of the ;x.

Pilgrim’s CEO Bill Lovette said the chicken industry appears to be headed toward production cuts between 6% and 8% by the fourth quarter of 2011, which would help raise chicken prices in 2012, but something more is needed – a way to pass high and volatile ingredient costs along to consumers. As a result, Pilgrim’s is adopting cost-based or market-based pricing of chicken in 2012 contracts with retail and foodservice customers.

Pilgrim’s reported a net loss $128
million in the second quarter of 2011,
even as it continued to improve oper-
ating ef;ciency and reduce costs. In
an earnings conference call, Lovette
estimated that Pilgrim’s will pay $500
million to $600 million more in feed
ingredient costs in 2011 than in 2010.
Actual feed ingredient purchases were
approximately $254.7 million higher
during the second quarter versus 2010,
with corn increasing by 92% and soy-
bean meal increases reaching 29%.
“Signi;cant pricing improvements
are needed with costs of feeding in-
gredients continuing to range where
they are today. The chicken industry’s
business model is not sustainable at

W

these ingredient cost levels and that’s why we are taking a much different approach with respect to pricing with our book of business. The model where 12 months of volume is committed at a ;xed price is not sustainable in our business and Pilgrim’s is planning to move to pricing contracts that are either cost or market based,” he said.

Initial discussions with customers about the new pricing model have gone well, Lovette said. “Many customers already buy a signi;cant amount of their inputs on a market-price basis. QSR burger chains, for example, buy beef trimmings on market-based pricing, so this is a concept that they understand.”

Steps to reduce costs,
improve yield

In addition to the new pricing
model, the company has set opera-
tional goals for pro;tability:
✔Achieve consistent performance in
the top quartile of Agri Stats, an
industry benchmarking service
✔Capture $400 million in improve-
ments on an annualized run rate
in plant cost and yield by the end
of 2011

✔Improve the company’s balance
sheet by turning assets into cash
to pay down debt and minimizing
capital spending
Lovette said the company’s im-
provements in plant cost and yield
were approximately $270 million on
an annualized basis as of June. “We
still have some work to do on price and
mix but we’re com-
mitted to achieving
that $400 million
run-rate goal by the
end of the year,” he
said.

Forecast depends on economy,
sustained industry cuts

Lovette said the company’s and the industry’s pro;tability in 2012 hinges on a number of factors, including the general economy and how deep and sustained the industry production cuts turn out to be.

“I think it is going to take a combination of supply cuts and an improvement in the economy for industry pro;tability to get back to normalized ranges. We are not seeing the seasonal demand for chicken that we would have expected, especially at these low prices in the face of record high beef and pork prices at retail,” he said. ■