The importance of corn and soybeans
Corn feed and soybean feed are the primary input costs in chicken production for Pilgrim’s Pride (PPC). In 2013, corn accounted for 50% of the feed cost, while soybean accounted for 27%.
Corn is the primary feed ingredient for livestock production. According to the USDA, most of the US corn crop is used as a “main ingredient in livestock feed.” Tyson Foods (TSN), for example, had corn and soybean meal account for 71% of its live chicken production costs in 2013. TSN is part of ETF Consumer Staples Select Sector SPDR Fund (XLP), which also holds Pilgrim’s biggest customer, Walmart (WMT).
Why corn and soybean feed?
The US is the leading corn producer in the world. According to the United States Department of Agriculture (or USDA), famers grow corn on 80 million acres, making it the most planted crop in the US. The US exports about 20% of the corn US farmers produce.
Soybean is the second most planted crop after corn. The US government also provides subsidies to corn and soybean farmers, which makes these two crops cheaper options to use as feed.
According to a study conducted by Iowa State University, Department of Agronomy, soybean helps to rectify the nutrient deficiency in a corn-based diet. Companies like Sanderson Farms (SAFM) employ nutritionists in-house to recommend a balanced diet for its chickens.
Corn price has recently hit a five-year low at $3.28 per bushel. Corn and soybean prices are impacted by supply side factors such as floods or draughts, which can result in a poor harvest. Demand side factors include the requirement of corn for ethanol production.
While corn and soybean prices fluctuate, Pilgrim’s Pride, as well as other companies like Sanderson Farms (SAFM), use financial instruments to hedge this risk.