Why vertical integration is beneficial for Pilgrim’s Pride

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Vertically integrated poultry industry

Pilgrim’s Pride Corporation’s (PPC) poultry production process is vertically integrated, meaning all stages of chicken production are in full control of the company. Vertical integration helps reduce cost layers, which means higher profit margins and more control over the quality of the final product.

PPC Vertical Int 2014-11-18

According to the National Chicken Council, most of the poultry processing business in the US is vertically integrated. For example, companies such as Tyson Foods (TSN), Sanderson Farms (SAFM), and Hormel Foods (HRL) have vertically integrated facilities for poultry production and processing.

The poultry processing industry is a part of the consumer staple sector, which also includes the Consumer Staples Select Sector SPDR Fund (XLP). This ETF also holds Tyson Foods.

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The vertical integration process

In a vertically integrated process, the company controls the chicken production. The process starts with a primary breeder, which provides breeder chicks to a breeder farm. These breeder chicks in turn give eggs, called the hatching eggs, which are passed on to the hatchery.

The hatched chicks then go to the grow out houses who look after the chicks until they reach a slaughter weight or broiler weight. Pilgrim’s Pride provides the chicken, feed, as well as medicines and vaccines to these grow out houses.

Once Pilgrim’s Pride gets the final broilers, it processes them, and may add further value such as marinating and pre-cooking. The company then sells the product to distributors, retailers, or food service customers.

Facilities

As of the year-end 2013, the company had 36 hatcheries and 28 feed mills with a total capacity to process 34 million chickens per week. Pilgrim’s Pride contracted with about 3,750 growers to grow its chicken.

When we speak of facilities, it is important to talk in terms of the company’s capacity to produce chicken. We will look at this in more detail in the next post.

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