Priciest corn ever is gobbling up margins on Brazilian chicken

Bumper corn crops typically signal cheap feed and fat margins for chicken producers in Brazil. Not this year though, as strong exports and increasing demand from the biofuel industry have sent grain prices soaring.

Despite back-to-back record corn harvests, domestic prices of the yellow grain have jumped 68% this year to an all-time-high, according to University of Sao Paulo research arm Cepea. With feed accounting for most poultry costs, producers have seen their margins evaporate as they’ve been unable to pass on the additional expenses to consumers.

This month, the country’s chicken export margin reached negative 12%, the bleakest since 2016, according to Itau BBA’s Cesar de Castro Alves. The situation prompted Credit Suisse to lower its recommendation for chicken giant BRF SA this week to the equivalent of hold.

“The chicken sector is struggling with difficulties to pass on higher costs,” Ricardo Santin, head of chicken and pork exporter group ABPA, said in a telephone interview. Some producers will discard older breeding chickens to save on feed expenses, leading to a decline on poultry production from 5% to 10% in the fourth quarter this year, he said.

Behind corn’s surge are strong exports of the grain and increasing demand from the ethanol industry. With new biofuel capacity coming on stream, the ethanol industry now accounts for almost 10% of total domestic corn demand. In the season that starts in February, Brazilian ethanol makers may increase their corn consumption by as much as 25%, Ana Luiza Lodi, an analyst at StoneX, said.

Corn accounts for about 9% of ethanol produced in Brazil, with most of the biofuel made from sugar-cane. Ethanol prices, which collapsed in the first few months of the pandemic, are starting to recover.

“This new dynamic is affecting the chicken and pork industries, which have been forced to plan their corn purchases more carefully,” Lodi said.

Besides record-high corn prices, chicken producers in Brazil, the top exporting nation, are also facing inflation in another feed ingredient. Soybean-meal prices have almost doubled this year on low supplies, according to Cepea.

At the same time, chicken export prices have declined on lower demand from traditional buyers, such as Arab nations, despite rising shipments to China. While local prices have edged higher in the wake of gains in beef and pork prices, that hasn’t been enough to offset soaring feed costs. Strong pork and beef exports are pushing up domestic prices of these proteins.