No-antibiotic McChicken will cost producers

McDonald’s pending ban in the U.S. on treating chickens with medications used for humans is expected to increase production costs

CHICAGO/LOS ANGELES (Reuters) — McDonald’s Corp.’s decision to phase out human antibiotics from its U.S. chicken supply will add to production costs in a tight-margin business that are likely to be borne mostly by poultry companies.

McDonald’s has given its producers two years to eradicate all antibiotics that are used on humans from barns and hatcheries.

It’s going to be expensive and may take longer than planned: switching to antibiotic-free chickens could increase on-farm costs by up to three percent.

Perdue Farms said it’s taken more than a decade and millions of dollars to make such a change.

McDonald’s will use its purchasing muscle as the world’s largest restaurant chain to avoid passing extra costs on to customers, who are increasingly lower income as more affluent diners prefer competitors such as Chipotle Mexican Grill Inc., say analysts including Morningstar’s R.J. Hottovy.

Marion Gross, McDonald’s senior vice-president of North America supply chain management, declined to say how much the company’s costs for chicken could increase. Instead, she said the project is “an investment” to meet customer demand.

Veterinary use of antibiotics is legal, but controversy has grown over routine feeding of antibiotics that are important to humans to otherwise healthy chicken, cattle and pigs in a bid to stave off disease and help the animals grow more quickly.

The risk is that overuse could spur the creation of antibiotic-resistant bacteria that develop cross-resistance to antibiotics used to treat humans.

Reuters found last year that major U.S. poultry firms were administering antibiotics to their flocks on the farm far more pervasively than regulators realized.

The poultry industry maintains there is little evidence that bacteria that do become resistant also infect people. However, more restaurants and retailers are heeding the concerns of consumers, which has strained meat supplies.

Last year, sandwich chain Chick-fil-A gave its producers five years to meet its commitment to go antibiotic-free for chicken. Perdue is a major supplier to Chick-fil-A.

Costco Wholesale Corp., the third largest retailer in the U.S. that annually sells 80 million rotisserie chickens, said it has a “large” appetite for chicken free of these medically important antibiotics.

The company is aware of the supply difficulties and won’t commit to a timeline, said Craig Wilson, vice-president of food safety for Costco.

Some of the extra costs of cutting out antibiotics may be borne by franchisees, which could cut labour hours, waste and utility costs to offset higher meat prices.

However, most analysts expect McDonald’s to push the costs back onto its suppliers, who may not have the market power to resist. The top four U.S. chicken processors control 53 percent of the domestic market, according to the National Chicken Council.

McDonald’s “carries a lot of clout with suppliers,” and some of them are dependent on the chain for survival, Hottovy said.

Tyson and Keystone Foods, part of Brazil-based Marfrig Global Foods SA, both said they have significantly reduced medically important antibiotic use in their flocks and are positioned to meet McDonald’s and other customers’ needs. However, neither company would answer specific questions about how such drugs are used on-farm and in hatcheries.

Perdue, the fourth-largest domestic chicken producer, began removing antibiotics used for growth promotion in 2002 amid consumer questions about what was being put into the animal feed, said Bruce Stewart-Brown, senior vice-president of food safety, quality and live operations.

More than 95 percent of the chickens it produces are now raised without antibiotics approved for human use, and more than half are raised with no antibiotics of any kind, according to the company.

The transition led to unexpectedly high bird mortality rates, a need for more chicken houses and spending at least US$4 million more a year on vaccines than rivals who haven’t made the switch.

Stewart-Brown said birds raised without antibiotics also take three to nine days longer to reach their market weight, or as much as 20 percent longer than conventionally raised birds.

McDonald’s two-year deadline is “a really fast time frame to do it right and be predictable to your customers and your supply,” Stewart-Brown said.

Birds raised on farms without antibiotics take longer to reach optimal slaughter weight, resulting in higher feed costs and death rates, which forces companies to increase the number of eggs produced at the hatcheries, said Tom Elam of FarmEcon, an agricultural consulting company.

“The ones that aren’t quite as good with keeping up with their biosecurity, it’s going to cause some issues,” Elam said.

“This change is not free.”

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