By Jamie Smith Hopkins, The Baltimore Sun
4:28 PM EDT, June 25, 2011
On Maryland's Eastern Shore, everything leads back to chickens.
The poultry industry is the largest piece of a key sector of the local economy — agriculture — and its reach is broad: from the truckers who move products and the many farmers who grow corn for chicken feed to the corner stores and other businesses that rely on customers' income.
Any hint of disruption to that economic ecosystem makes people nervous. And these days, it's more than that.
The bankruptcy filing this month of Allen Family Foods, a Seaford, Del., poultry firm that provides direct employment to hundreds on the Maryland Shore, has left many more here worried about their future.
"It's not going to be good," said Lee Richardson, 40, a grain and poultry farmer in Wicomico County. "The question is just how bad. We don't know."
Allen, which hopes to sell nearly all of its assets, blamed the rapid price increases in corn. That's also a pressing problem for larger competitors such as Salisbury-based Perdue Farms and Mountaire Farms of Delaware.
Even as corn costs more than doubled in the space of a year, reduced demand for chicken has depressed the price that companies can charge.
"What this scenario does is highlight the fragile state of the poultry industry here in Maryland," said Earl "Buddy" Hance, the state's agriculture secretary. "Right now, we're in a market where every penny counts. When you're operating on pennies, it's very precarious."
Unemployment on the Eastern Shore runs higher than in Maryland as a whole, and jobs have been especially hard to come by since the recession. Unemployment in Somerset, Dorchester and Worcester counties has averaged more than 10 percent this year. It is not a region that needs another economic shock.
Mountaire is optimistic enough about the future that it is interested in purchasing Allen facilities. The Millsboro, Del.-based company wants to expand production by 400,000 birds per week.
But that increase is just one-fifth of Allen's production, leaving Allen employees and the farmers who raise the company's birds on contract in a scary place as they wait for the dust to settle.
Jenny Rhodes raises chickens in Centreville for Allen. She had expected that her two sons would take over when she retired.
"I've been in the poultry industry for 24 years and I never thought this is something I would be facing, I can tell you that," she said. "Never, never."
A major employer
With a 450-person processing plant in the tiny town of Cordova, Allen is the largest commercial employer in Talbot County. The company employs nearly 70 more people at a rendering plant in Dorchester County. Just over one-third of its contract farmers, about 90, are based in Maryland.
Hance, the agriculture secretary, is especially concerned about those farmers because chicken houses are expensive to build and upgrade — they are an investment that in most cases involves a long-term mortgage. And there's not much a chicken house can be used for if there are no chickens.
Several decades ago, the region was home to more than a dozen poultry companies, known as "integrators," that hatched eggs, trucked chicks and feed to farmers, picked up the grown birds and processed them.
With Allen planning to become a much smaller niche firm focusing on antibiotic-free chicken, the options for local farmers have shrunk to four: Perdue, Mountaire, Tyson Foods and Amick Farms.
State officials fear that Allen farmers who cannot land a new contract could end up following the company into bankruptcy — particularly if they have mortgages on their chicken houses.
The Maryland Department of Agriculture is talking to the U.S. Department of Agriculture in hopes of tapping into a program that helped poultry farmers after Pilgrim's Pride filed for bankruptcy protection in 2008.
State and local economic development staffers are bracing for layoffs at Allen's plants in Maryland. Both locations are on Mountaire's "want list." But the company says it can't discuss its plans for the facilities before it knows whether it will acquire them. A sale could be approved as soon as next month.
"It would really be presumptuous to start telling people what we're going to do with something we don't own," said Michael Tirrell, Mountaire's vice president of human resources and business services.
Cordova, population 520, is emblematic of the region's dependence on the poultry industry. The town is surrounded by chicken houses that stretch longer than football fields and by hundreds of acres of corn, soybeans and wheat — grains sold largely to the poultry industry.
Cars share the road with hulking combines. And along Cordova Road, the town's equivalent of Main Street, sits Allen's processing complex. Its employee base outnumbers the adults in Cordova. Workers stream in every morning from across the Shore, and the company has bused in some employees from as far afield as Baltimore — 60 miles distant.
"You just don't think about something like that coming to an end," said Teresa Dawson. Her family owns Tuckahoe Seafood across the street from the plant, selling crabs and produce to Allen employees and others — many connected to the poultry industry.
"I can't imagine what the long-term consequences would be," she said.
Charlie Rice, who opened Rice's Country Store down the street 40 years ago, would love to see the Allen complex stay open. But he says he doubts that will pan out because Mountaire is focused on expanding its Delaware plants.
"There's so much uncertainty," he said.
A corn problem
Allen got its start with a single hatchery in 1919. The family-owned company built and acquired locations across Delaware, Maryland and North Carolina, once employing nearly 2,300. Then it all unraveled.
The company did not return telephone calls seeking comment. But in its bankruptcy filing, it identified skyrocketing feed costs as the "leading adverse factor" affecting the business.
Feed corn cost $7.11 a bushel in May, more than double the $3.44 price a year earlier, according to the latest statistics from the USDA's Economic Research Service. Corn is the major component of chicken feed, followed by soybeans, whose price is up nearly 20 percent over the period.
Chicken feed is a poultry company's major expense. Every $1 increase in corn has added $10 million in annual costs, Allen said in the bankruptcy filing.
Corn prices have fallen below $7 in recent trading — amid chatter that less-costly wheat could take its place in animal feed — but still remain near historic highs. Explanations are many: high demand for animal feed around the world; corn going to ethanol at home, fueled by federal subsidies; speculation on the commodities market. And, on top of it all, depressed supply.
"It's pretty bad right here — the last appreciable rainfall was May 19," said Kennedyville grain farmer Brian Quinn, a past president of the Kent County Farm Bureau.
Rising fuel costs also have taken a bite.
But poultry companies don't have the pricing power to make up for cost increases. A USDA index that tracks wholesale prices for chicken parts shows a 6 percent decrease in the past year. What grocery stores charged shoppers for chicken parts rose slightly, according to the Consumer Price Index.
"The majority of chicken companies in the United States are losing money," said Bill Satterfield, executive director of the Delmarva Poultry Industry Inc., a trade group.
Diversification has helped some companies hang on. Perdue, the biggest player in the region, produces not just for wholesalers but also sells more profitable retail products — convenience foods such as nuggets and individually wrapped chicken breasts. Perdue AgriBusiness buys grain and sells it internationally. Together, Perdue Farms and Perdue AgriBusiness employ about 20,000 people.
A race for new contracts
But the bad news for farmers is that Perdue isn't positioning itself to produce more chickens: It's looking for ways to make more money from the 635 million per year that it's processing now.
"One of the factors that hurt Allen is the oversupply in the industry," said Joe Forsthoffer, a Perdue spokesman. "So we obviously want to be careful to match supply and demand."
Mountaire needs more farmers to meet its expansion goals, though not nearly as many as Allen used. Arkansas-based Tyson says it doesn't have an immediate need in the area. Amick, a South Carolina company that got a toehold in the region when it bought facilities from Allen last year, did not return phone calls seeking comment.
Rhodes, who raises chickens for Allen, said some of the company's farmers have landed with other integrators and some are on waiting lists.
But she said no company appears to be interested in picking up farmers northwest of Route 301 — in Queen Anne's and Kent counties — because of the distance from their feed mills. She is one of about 30 Allen growers there.
Because she's also an agricultural agent with the University of Maryland Extension, Rhodes has heard from many worried farmers. She suggests they call their lenders for advice as well as every government official in a position to help — just as she has.
"I don't ever want to say we just rolled over and did nothing," Rhodes said.
It's an anxious time for farmers with other companies, too. They figure the integrators might decide to drop some of them to pick up Allen's most successful growers, a miserable game of musical contracts.
"Right now, I'm doing really well with Perdue," said Richardson, the Willards farmer. "Two years ago, I was doing bad. If I was in that position, I'd be really worried."
Lemmie Swann, a longtime grain and chicken farmer in Talbot County, said poultry houses are so sophisticated these days — with computers that control the temperature and feed the animals — that they cost more than some houses for people.
It's up to the farmers to retrofit when companies demand it. Swann said Allen farmers might have to pour more money into their buildings to get a new contract.
"Our serviceman from Perdue said their phone has been ringing off the hook because people have been calling, wanting to get on with them," he said. "But their houses don't meet Perdue specs."
Even for the in-demand grain farmers, upheaval in the poultry industry is unsettling. The integrators have long bought almost everything they produce to feed chickens in the region. Farmers don't want that customer base to vanish.
The same goes for suppliers, Chad Nagel said. His family's company — Nagel Farm Service — buys grain from farmers, stores it and sells it to companies throughout the year.
The Preston-based grain dealer has been doing business with Allen for three generations. Now it is one of the many creditors in Allen's bankruptcy case.
Nagel has watched the upward march of grain prices on the screen mounted in his office and worried about the consequences.
"It speaks to our way of life," Nagel said. "It's one thing that's allowed the U.S. to enjoy a standard of living above most of the rest of the world — we've got extra money to spend on Friday with our paycheck because a small portion goes to the grocery store. … It's a concern when you see a vital part of that formula take a hit."
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