U.S. places $40 million chicken order

The United States is making a special bulk purchase of poultry products that's partly aimed at shrinking the glut of chicken in the market and keeping producers in business.

NEW YORK (CNNMoney) -- The United States is stepping in to help bail out another American industry -- chicken farmers and meat processors.

The nation's chicken industry is having a difficult year. Chicken producers are struggling with higher costs of running their business at the same time that consumers are buying less meat.

This has created a glut of chicken products in the market.

Total chicken production in the first half of 2011 rose 4% compared to the same period a year ago, while demand for chicken has cooled, according to the National Chicken Council.

Consequently, retail prices for chicken product have dipped.

The Department of Agriculture, keenly aware of these issues, announced Monday that it will make a special purchase of up to $40 million of chicken products, which the government will then donate to federal food assistance programs such as soup kitchens and its national Feeding America programs.

The USDA steps in occasionally to buy up food products that are in surplus supply in the market. By doing this, it helps shrink the glut of product, raise retail prices and support producers that are struggling to cover their cost of production.

With Monday's chicken order, the USDA said it hoped the move would also provide support to the broiler industry and many small poultry [producers]. Broilers are chickens grown for meat as opposed to egg laying.

"Broiler producers have already cut production substantially and this purchase will help them bring supply in line with demand," the agency said.

The government made a similar move with a $30 million purchases of chicken products last year and a $42 million purchase of chicken products on 2008 with the intention of stabilizing retail prices.

The USDA said funding for the special purchases comes from customs receipts.

For its part, the National Chicken Council welcomed the bail out.

"At a time when the industry is under great stress due to the high cost of feed ingredients and the general economic slowdown, we appreciate USDA's willingness to step forward," the group said in a statement.

Bill Roenigk, economist with the National Chicken Council, said chicken producers have been hit with a double whammy.

First, high grain prices have significantly raised production costs for producers. Second, a difficult economy has changed how people shop for food and also what groceries they buy.

Many budget-conscious household aren't buying chicken even though an excess supply of chicken products is keeping retail prices for chicken below last year's levels, he said.

In June, the average store price for a pound of boneless chicken legs was $1.45, down 2.6% from last year, and $3.12 for a pound of boneless chicken breast, also down 5.9% from a year ago, according to government data.

"Many of our producers are selling whole chickens at wholesale prices that don't even cover their cost of production," Roenigk said. "We've lost three or four companies already this year because of it."

Every year, the industry sells about $45 billion worth of poultry meat. "We're expecting that total to be down 5% to 6% this year," he said.

The USDA's July report on poultry outlook seems to support Roenigk's assessment.

The agency, blaming higher grain prices and a difficult economy, expects broiler meat production in the second-half of 2011 to fall below last year's level and also anticipates broiler meat production to slow down in 2012.

Roenigk hopes the latest government assistance quickly stabilizes prices for poultry producers.

While that would be a good thing for producers, it could happen at the expense of consumers since reducing supply tends to raise retail prices for the product.

Retailers typically shy away from raising product prices. So Roenigk suspects stores will try to couch any prices increases. "You could see retailers offering discounts and specials on chicken less often than they have been," he said.