Is poultry farming an answer to the food crisis?

There's nothing like a sharp rise in prices to make people come to their senses. Environmental groups have been trying to tell governments that our oil-fuelled lifestyle was unsustainable since the 1970s, but nobody was going to pay any attention until oil hit $100 a barrel. Now we have truckers on slow-drive protests, striking oil workers holding entire economies to ransom, and commuters leaving their cars at home. Even the Americans seem to be overcoming their fondness for SUVs.

The story is exactly the same with food, says Morgan Stanley analyst Robert Feldman. Just as the soaring crude oil price is warning us that we need to find alternative, more efficient, energy sources, so global grain markets are telling us we have to eat more efficiently. Wheat, soybean and corn all have spiralled in price as Asia has developed an appetite for meat and America diverts corn harvests to biofuel production. But this is unsustainable. At current prices, farmers can no longer afford to feed all the cows, pigs and chickens we eat. Something has to give, says Feldman either the average country cuts its meat consumption by 43%, or there will be a lot more grief at the grocery store.

That's why we are about to see a big shift in the world's diet from beef and pork to chicken. Why? Because the soaring grain price doesn't hurt chicken producers as much as it does pig and cattle farmers. Chicken is a far more efficient consumer of grain than other meats. It takes only two pounds of corn to produce a pound of chicken, as opposed to four pounds to produce the same amount of pork. Poultry farming is also a lot less energy intensive than beef and cattle farming. That means that chicken producers don't face nearly the same level of pressure to lift their prices as pork or beef farmers. The last time there was such a dramatic surge in grain prices, back in the early 1970s, sales of chicken soared at the supermarket as pork and beef became too expensive for the average household.

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That's not to say that chicken producers are entirely immune to rising feed costs. Poultry companies in America have taken a pasting this year, notes Matt Andrejczak for Market Watch. Industry giant Pilgrim's Pride reported recently that grain prices had pushed up the cost of producing a live chicken by 65% over the past two years. The group has even shut down a chicken-processing complex and six of its 13 American distribution centres in recent months to cover costs.

But it's not US consumption investors should be focusing on. The real shift will be seen in developing countries. What was once a luxury food source before incomes rose and roads existed to transport such a delicate cargo has now become a staple in the diet of Asia's emerging middle class, for example. China gets through 24 billion chickens a year, compared with 600 million pigs. But the pressure on animal feed stocks means that for meat consumption to remain sustainable over the next ten years, chicken will have to become even more popular rising from 35% of current meat consumption to 57%, according to Morgan Stanley. That's a huge shift by any standards.

The main threat to chicken producers in the developing world remains disease. An outbreak of avian flu is bad news for chicken farmers even those not directly affected are hurt by the fear it stokes among consumers. But disease is a risk for all livestock farmers, and with chicken's growing popularity it would take a devastating outbreak to cause any long-term damage to demand. We look at a thriving developing market chicken producer below.

A Mexican chicken producer that could lay you a golden egg

American chicken farmers may be struggling with feed costs, but south of the border in Mexico things are a little different. Chicken consumption per head is rising by 7% a year as the Mexican population has become richer over the past decade. That has seen local producers trump the big American chicken producers in their home market. Chief among these is Industrias Bachoco (NYSE:IBA). This company is the market leader in Mexico, accounting for 30% of chicken sales, and 12%-13% of egg sales.

Industrias Bachoco has a couple of big competitive advantages in its market, James Vanasek of VN Capital Management tells Value Investor. The company has an unparalleled refrigerated distribution network in the country, including warehouses and trucks. And it beats the big US competitors by supplying whole chickens which Mexicans prefer to the chopped chickens that American groups Pilgrim and Tyson supply.

The firm has $300m in cash piled up for acquisitions, which puts it in a superb position to tap the ten-million-plus Mexican expatriots living in America, by buying a producer on that side of the border. The stock has been run down in recent months on fears of an outbreak of avian flu, and is now trading on a reasonable-looking forward p/e of 9.4, offering a 2.3% dividend yield.