Good morning, and welcome to the third quarter 2020 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen-only mode. At the company's request, this call is being recorded. Please note that the slides referred during today's call are available for download from the investor relations section of the company's website at pilgrims.com. Now I'd like to turn the conference over to Dunham Winoto, Head of Investor Relations for Pilgrim's Pride. Please go ahead, sir.
Good morning. Thank you for joining us today as we review our operating and financial results for the third quarter ending September 27, 2020. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the investor relations section of our website, along with the slides we will reference during this call. These items have also been filed as 8-Ks and are available online at www.sec.gov. Presenting to you today are Fabio Sandri, President and Chief Executive Officer and Chief Financial Officer, and Joe Waldbusser, Head of Commodity Risk Management. Before we begin our prepared remarks, I'd like to remind everyone of our safe harbor disclaimer.
Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning those factors has been provided in today's press release, our 10-K, and our regular filings with the SEC. I'd now like to turn the call over to Fabio Sandri.
Thank you, Dunham. Good morning, everyone, and thank you all for joining us today. For the third quarter of 2020, we reported net revenues of $3.08 billion, an adjusted EBITDA of $305 million or a 9.9% margin, 18% higher than a year ago, and an adjusted GAAP EPS of $0.66. I would like to express my sincere gratitude to our global team for their continuing commitment, dedication, and hard work in supporting our ability to keep our team members safe and healthy while maintaining our ability to produce and supply customers during this challenging time. I could not be more proud of our team as they have continued to come together to support one another, our customers, and consumers. Safety is a condition of Pilgrim's, and our team members responded admirably to the unprecedented conditions, supplying products to our customers.
We are continuously adapting our global operations to the change in channel demand while adjusting our operations to be able to maintain the operations at all our plants and minimize any significant disruption due to labor and health issues. We remain diligent in implementing precautionary, proactive steps to better safeguard the wellness and health of each team member while fulfilling our essential duty as a food producer to consumers in every region where we operate. We incurred direct COVID-19 mitigation costs of roughly $27 million for the quarter and close to $77 million year to date. The direct costs are related to the extra cleaning of our production and common areas, the extra PPE, including masks and face shields that we are providing to all of our team members, and installation of physical barriers in our production areas.
We also installed dual technology UV and bipolar ionization in every plant to filter the air and neutralize potential viruses. We are offering free live health online services that allow for virtual doctor visits at no cost and above all CDC guidelines. We remove vulnerable team members from facilities with full pay and benefits during community outbreaks. These figures includes indirect costs. There are a lot of indirect costs that are more difficult to precisely quantify, such as overall disruptions to our operations, less optimal mix, and production efficiencies that are not included in these numbers. We are supporting our communities with our Hometown Strong initiative. It is an example of how we value the important role we play in the communities where our team members live and work.
We understand the responsibility that comes with being a major employer in rural communities, and we work hard to contribute to the well-being of those communities by not only providing gainful employment opportunities but also participating in volunteerism, donation, and sponsorship opportunities. This quarter, we accrued $50 million in SG&A for this initiative. Turning to the specifics of our business, despite continuing volatility and challenging marketing environments in Q3 and added operating costs, we have continued to generate a superior relative performance to the competition and have remained resilient to market fluctuations. This is a reflection of our portfolio approach, including the strategy on well-diversified products, broad geographical footprints, and a relentless focus on key customers. For the full quarter, operating performance both in U.S. and Mexico significantly improved sequentially, and Europe also continued to increase despite the challenge due to COVID-19.
In Q3, we saw market conditions continue to recover across all of our global operations, with the U.S. and particularly Mexico experiencing the stronger rebound in performance relative to weak conditions during the first half of the year. We are pleased with the results, especially when taking into account all the disruptions, less than optimal product mix, and added operating costs when compared to the environment in 2019. Despite continued challenges in global market conditions due to COVID-19, our consolidated results have also remain well-balanced and the result of our vision to become the best and most respected company, creating the opportunity of a better future for our team members.
To support our vision, we are continuing to implement our strategy of developing a unique portfolio of diverse complementary business models, continuing to relentlessly pursue operational excellence, becoming a more valued partner with key customers, and creating an environment for safe people, safe products, and healthy attitudes. While market conditions in all our global operations are continuing to improve during the quarter, food service demand globally still has not reached prior levels, and the environments are still quite challenging in some sectors where we operate. Disruptions from COVID-19 have continued to present a significant challenge on each individual country's demand for protein consumption, as well as for the flow of global trades, and generate volatility far beyond normal seasonal factors. We maintain our strategy while continuing to improve the portfolio to better respond to individual market dynamics and generate a relative increase in performance over our peers.
We believe this approach will give us higher and more consistent results for the mid to long run and minimize the full peaks and troughs of the commodity sectors. During the third quarter in the U.S., we are continuing to see demand recovering at our fresh operations, including from some sectors within foodservice, with more states gradually losing travel and movement restrictions. QSR volume has been especially strong, and demand from our customers has been outperforming the industry. Similar to last quarter, commodity large bird deboning was once again the most challenged during Q3. Operationally, however, we continue to improve our relative performance versus the industry across all business units. We're continuing to adapt to the shipping channel demand by increasing our volume mix to key customer retailers.
In addition, a large portion of our food service customers are also within the QSR segment, which has further dampened the impact across our fresh business unit models. Our portfolio of differentiated products, along with our key customer model, are giving us better insulation against the volatility. We're also much better positioned to adjust product and channel mix given our presence across all bird sizes, from small to large. Within the small bird and case-ready segments, market supply and demand was again very well-balanced during Q3. Demand from retailers, especially from our key customers, was strong, supporting improved performance of our case-ready business. Our market leadership in these categories and more differentiated product portfolio have continued to strengthen the growth of our competitive advantage versus the industry.
While we commitment to our key customer strategy has been reflected in the consistency for our past results, the value of this approach has never been more relevant to our growth than during the current times of great uncertainties and challenges. To further support the growth of key customers, we are doubling our case-ready capacity at our plant in Minnesota by increasing the number of heads processed at the plant, while also raising the mix of more stable margin case-ready products. With this addition, we also expect to increase by 20% our production of our differentiated higher attributes Just BARE brand products. It is also supporting our conversion of one plant from the commoditized large bird deboning to a key customer QSR in the small bird segment.
The strong relationships we have with key customers are giving us many opportunities to sustain our volume increase since these customers rely on us to satisfy their need for growth. In addition, many of our key customers maintain a leadership position in their respective categories. As a result, we are direct beneficiaries of their ability to outgrow their competition. Beyond driving pure growth, our key customer strategy also promotes trust, enhances long-term relationships, and strengthens our margin structure. In the U.S. prepared foods business, revenue declined 23% on 26% less volume year-over-year. A large part of this decrease, 70% of the volume, was driven by schools remaining closed, partially offset by strength in the retail demand. On the other hand, our margin from sales have improved 29%, driven by more favorable price and mix.
We continue to simplify our portfolio to improve efficiencies and shift resources towards branded growth in the retail channel. Our Pilgrim's brand sales grew 52%, and our Just BARE brand gained a new distribution, resulting in dollar share growth in the retail channel. Turning to cold storage data, at the end of August, broiler inventory was up 2% from the close of Q2, but down 1% from the previous year. Leg quarter inventories were up 10% compared to last year. This is not surprising considering the mix simplification due to ongoing labor constraints seen during Q3 and overall lack of worldwide financial liquidity as a result of COVID-19. As some markets reopen and the pipelines are empty, we are seeing some increase in leg quarter sales during October and a reduction in inventories and upward movement in prices.
U.S. poultry exports, including paws, were up 4.7% year-over-year throughout August. Broiler meat alone was up 3%. In contrast, through Q3, our exports have increased by 14% year-over-year, outpacing the market. China continues to be a significant growth driver, and we believe the impact of ASF in Southeast Asia and now Germany can provide further support to export demand. As we approach the one-year anniversary of China reopening to U.S. poultry, producers are presented with a vastly different market landscape than a year ago. China has solidified itself as one of the largest export destinations for poultry, second only to Mexico. China's presence as a significant buyer keeps diversification of our export portfolio a high priority. We have added 95 new direct clients in 2020 and have also continued to diversify our product and destination mix.
Sales of non-traditional export items are up 30% year-over-year, which strengthens the cutout margin. We enter Q4 with optimism as we continue to place commodity items efficiently, leverage Pilgrim's overall portfolio diversity, and prioritize exceptional customer service to meet the needs of our key customers around the world. After a very challenging first half in 2020, our Mexican operations delivered great results in Q3, and we recorded one of the strongest Q3 in the company's history, despite the unfavorable mix impacted and added operation costs relative to the same period last year. More normalized economic activities and improved supply-demand balance in the market, our increased share of non-commodity products, and our very good operational performance all contributed to the results. Although overall demand is improving, we remain agile and are continuing to adapt our facilities by shifting production to those channels that are experienced better relative demand.
Prepared foods in Mexico experienced some challenges, especially in the value categories, due to less traffic on retail, combined with a contraction in the QSR volume. We began to see some signs of improvements towards the end of the quarter, and we believe the positive trend can be sustained into Q4. We remain committed in long-term growth and demand prospects in Mexico. We are continuing to invest in our Del Dia and premium Pilgrim's brand, both in fresh and in prepared, as well as seeking more market share in the modern channel, which will bring more stable margins to our operations. Our European chicken operations deliver an EBIT in Q3 that was 13% sequentially above Q2, with both volumes and revenue 7% and 18% higher respectively, supported by our exposure to retail and the continuous recovery in food service and QSR demand in particular.
Relative to Q3 2019, EBIT was still higher 2%, despite 8% lower volume and 5% lower revenue. An easing of COVID-19 restrictions, the introduction of U.K. government incentive direct towards food service, as well as a consistent improvement in food service demand within continental Europe, have all contributed to a better sequentially improved performance versus the prior quarter, but still have not yet reached prior levels. Even during this challenging time, we continue to be relentless in investing in innovation, delivering labor and yield improvements, driving better efficiencies, managing our cost base, and offsetting cost increases to lean manufacturing techniques and capital investments around automation and process flow without sacrificing the health and well-being of our team members, which remains a priority. We are committed to delivering the safest work environment possible, improving the quality of our products, while achieving our sustainability agenda and bird welfare targets.
Our relative performance to the industry, measured as the result of the last 12 months, continues to show us improving and outpacing the average of the competition in Europe. For the next quarter, we expect further improvements coming from the food service and QSR segments as these segments adapt to the situation in each country, and we remain vigilant and prepared to react and adapt in case market conditions change. The performance of our newly acquired European pork operations have continued to improve, with EBITDA on an upward momentum. We have now been profitable on an EBITDA basis for the last six quarters in a row, with margins also increasing on a consistent basis.
The improvement in performance was driven by robust demand at retail, partially offset by a reduction in food service, continued strength in pork exports, especially to China, as well as the implementation of operational improvements and capture of synergies. Exports to China remained strong and were up 100% in Q3. Exports to China have doubled as a percentage of our total pork sales, and we expect demand from China to continue driving the strength in our overall exports in the near future. All of our European fresh pork facilities are approved to export from China, so we are well-positioned to benefit from those opportunities. We also continue to evolve in our strategy, and we will significantly increase our volumes with a new key customer in the next quarters. Integration of the assets is on track to expectations.
Over the next few years, we expect to generate an EBITDA improvement to achieve a level that is competitive with leading companies with similar portfolio. We have expanded our distribution capability for the newly acquired European assets through some recent wins to increase our retail exposure and strengthen our partnership with key customers. We are optimistic about building upon our operational improvements by continuing to optimize our manufacturing footprint, extract best-in-class operational excellence, capitalize export opportunities, optimize the portfolio of channels, segments, and products, as well as strengthening our growth business with key customers to drive innovation in value-added and higher margin areas. We have a great team in Europe dedicated to generating the best possible relative results by focusing on factors within our control while ensuring and protecting the safety and health of our team members.
Corn prices have been rising since August, driven higher by a combination of stronger-than-expected export demand and smaller-than-expected old crop ending stocks in the U.S. USDA is projecting new crop ending stocks at 2.7 billion bushels versus 1.9 billion last year, which includes a 550 million bushels increase in export demand. The current corn crop is projected at 14.7 billion bushels, the highest in four years, and over 1 billion bushels larger than last year. Although corn prices have risen from the lows we saw in August, prices are very similar to where they were this time last year. Soybean meal prices have also risen since August, driven higher by larger than expected export demand, primarily to China. USDA is projecting the current soybean crop at 4.3 billion bushels, up over 700 million from last year.
Despite the large increase in production, USDA is projecting new crop ending stocks at 290 million bushels, the lowest level in four years. The uncertainty over the size of the Chinese import program is causing increasing uncertainty and volatility in the oilseeds market globally. Wheat prices in Europe has also risen recently, despite the larger than expected Russian wheat crop, and projected increased supply in other major wheat exporters like Australia. A slow start to the planting season in Russia and larger than expected export demand out of the U.S. are contributing to the rise prices in the wheat market. On the chicken production, according to the USDA, Q3 was down half of a percent relative to Q3 2019, as increased live weights did not offset headcount reductions.
The industry continues to maintain a larger layer flock with current levels 4.4% above last year, in line with the trends observed in Q1 and Q2. The industry has also managed to reduce the average age of laying hens, promoting a younger, more efficient breeders. This has allowed the industry to maintain flexibility to manage supply of eggs in the short term, while enabling growth in the long term as the demand environment improves. Overall, the trend has shown a slowing of pullet placement growth, which is in line with expectations, given that most of the pullet placement increases in 2019 and early 2020 were expected to be supportive of new capacity that has come online over that period. From Q2 - Q3, COVID-19 related restrictions have slowly been rolled back, with many businesses and restaurants opening under modified environments to protect worker and consumer health.
Throughout this process, consumers have proven highly adaptable to the new normal and have continued to modify their shopping and spending habits in response to the new normal environment. This new consumer environment favors the retail channel as many consumers are still required to work from home and choosing to limit exposure to potentially more crowded areas. As a result, retail demand for chicken, like that of all proteins, has remained supported throughout the quarter. While foodservice demand still trails below year-ago levels, this channel has proven highly adaptable and continues to improve each month from the low points in April, led by the QSR segments. Entering Q4, the USDA expects production to be flat for the quarter on a year-over-year basis. Before entering 2021, in which the USDA expects broiler production to grow 0.9% versus 2020.
High unemployment and consumer uncertainty contribute to a food macro environment and the fallout effects of COVID-19 will impact the channels differently. We expect the restriction of restaurant capacities, social distancing guidelines, consumer concern for individual health, and the adaptation of consumers to their personal economic situations to continue favoring the increased frequency of at home meals. Since chicken continues to be one of the most affordable and versatile proteins, retail demand is likely to remain above year ago levels. When we expect overall food service demand to remain more volatile and remain below year ago levels, at least in the near term, QSR's ability to adapt quickly to the new environment in a positive sign for the chicken industry moving from late 2020 - 2021. Our strategy is designed to adapt well to the challenging macroeconomic conditions while minimizing the impact from volatility in market conditions.
While we are already well-balanced in terms of our bird size exposure, we will remain diligent in seeking opportunities to incrementally diversify our product mix and reduce the commodity portion of our portfolio by increasing the number of differentiated products to key customers while optimizing our existing operations by pursuing operational improvement targets. Our key customer approach is strategic and creates a basis for further accelerate growth in important categories by promoting more customized, high-quality, innovative products to give us a clear, long-term, sustained competitive advantage while further improving the resilience to market fluctuations. With that, let's turn to additional details to our financials.
Our SG&A in the third quarter was higher versus a year ago as we improved the efficiencies of our expenses, but increased support for expanding the Just BARE brand nationally and the investment for our new prepared foods products both in U.S. and Mexico, as well as the inclusion of the new assets in Europe. Also included in the reported SG&A is our $50 million contribution to the Hometown Strong initiative and the DOJ agreement. We will continue to prioritize our capital spending plan this year to optimize our product mix that is aimed at improving our ability to supply innovative, less commoditized products, and strengthening partnerships with key customers.
Even during these uncertain times, while we continue to evaluate all CapEx projects and defer those we deem non-essential, we reiterate our commitment to investing on strong return on capital employed projects that will improve our operational efficiencies and tailor customer needs to further solidify competitive advantage for Pilgrim's. Our balance sheets continue to be robust, given our relentless emphasis on cash flows from operating activities, focus on management of working capital, and disciplined investment in high return projects. Our liquidity position remains very strong with more than $1.3 billion in total cash and availability. We have no short-term immediate cash requirements with our bonds maturing in 2025 and 2027 and our term loan maturing in 2023. During the quarter, our net debt was $1.9 billion, the lowest since 2016, and a leverage ratio of 2.5 x last 12 months EBITDA.
Our leverage remains at a manageable level, and we expect to continue to produce positive cash flows this year, increasing our financial capability to pursue strategic actions. We expect 2020 interest expense of around $130 million-$140 million. We have a strong balance sheet and a leverage that is within our target, which are supportive for us to act on great opportunities during these uncertain times. We remain focused on exercising great care in ensuring that we create shareholder value by optimizing our capital structure while preserving the flexibility to pursue a growth strategy. We continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy and continue to review each prospect accordingly to our value-creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.
First question is from Benjamin Theurer with Barclays. Please go ahead.
Hi. Good morning, Winoto. This is Antonio Hernández on behalf of Ben Theurer. My question is regarding COVID-19. How is your current level of absenteeism at plants? How has that evolved in recent weeks, considering the continuously high number of cases in the U.S.? If you can provide a kind of a run rate of protective measures related to COVID-19 during the quarter, and what do you see going forward? Thanks.
Yeah, thank you, and good morning. First, as we face this global COVID-19 pandemic, we have been guided by three principles. First, an uncompromised commitment to the safety of our team members. Second, recognizing and embracing a responsibility to provide quality food for the country, and of course, endeavoring to provide continuing employment opportunities and benefits to our team members during a time of unprecedented economic upheaval. The direct costs that we are related to the extra cleaning in our production and common areas. We're also providing the PPE, including the masks and face shields, to all of our team members, and we install physical barriers in our production area. Of course, we are maintaining social distancing wherever areas we can. We've built more than 10,000 barriers within the first 30 days of the pandemic, and we continue to upgrade those barriers.
We also installed that dual technology UV and bipolar ionization in every plant to filter the air and neutralize potential viruses. As I mentioned, we are offering free live help online services for all of our team members that allow for virtual doctor visits at zero cost. Above all, CDC guidelines, we removed the vulnerable team members from facilities with full pay and benefits during community outbreaks. That is creating some challenges to our operations because by removing those people, we have less people at our plants. Yeah, the situation is very fluid. It varies from plant to plant, but over the last months, we have increased our staffing to close to the levels that we were before COVID. We are already running a much better mix than we were during the Q2, and we are seeing a very good increase in our absenteeism levels.
As people are more familiar with what we are doing, as we are gaining the trust of the entire communities, people are less reluctant to return to work. With that, we've been improving our ability to execute the optimal mix. Of course, we're also working with our key customers to simplify our mix to create a more optimal footprint. With the frequent communication with them, we are ensuring their team members. We expect to return to the optimal operation in this quarter.
Perfect. Thanks a lot. I'm going with some new results.
The next question is from Ken Zaslow with BMO Capital Markets. Please go ahead.
Hey, good morning, everyone.
Morning, Ken.
Just two questions. One is, as you change your mix, what was the mix between big, small, and medium, say, last year? What do you think it's gonna be now? What do you think it's gonna be in about a year from now as you adjust your product mixes?
Ken, we are well-balanced between small birds, tray pack, and large bird deboning. What we are doing is as the demand has been shifting to more retail, we've been shifting our operations. With the growth of QSR, we have also adapt to those conditions. What we are doing for 2021 is to first, move that plant from big bird deboning to small bird deboning, which will increase our presence in that segment. We are also doubling the capacity in our Minnesota plant to comply or support the growth of our key customers and our Just BARE brand, which has doubled the sales in the online channel over this quarter. Looking into overall portfolio, we moved from 46% of our total sales in retail to around 51% just in 2020, with small changes in our operation.
For next year, expect 2% increase in that portfolio to the retail and a 1%-2% increase in the small bird with those two conversions.
Great. My next question is, can you talk about the sustainability of the Mexican margins? Particularly, I did see that there was a little bit of a FX benefit. How do you think about the Mexican operation? I think you did say that it's still continuing the momentum into the fourth quarter. How do you think about it for 2021? How do we frame it in our minds?
Yeah. Sure, Ken. We've been talking about Mexico over the last years, that they are very volatile quarter over quarter, but they're more stable if you take a longer period of time or within a year. What happened in the first quarter or the first semester in Mexico was a complete imbalance during supply and demand. The industry increased supply during the first semester. At the same time, demand, because of the COVID-19, really create a challenging environment. As you remember, in Mexico, there was no support from the government with the COVID-19 like we had in U.S. and Europe. There was no governmental stimulus or unemployment benefits, which created a sharp slowdown and recession in the region, which really affected the demand, both in the food service and retail.
While within U.S., we saw an increase in retail compensating at least partially the shutdown in food service, that didn't happen in Mexico, and that's why the supply and demand was completely off balance. As the industry adapted their supply for the Q3, and we at Pilgrim's adapted to that situation as well, we reduced our costs and we also cut production. The supply and demand improved a lot, and we saw the rebound in the food service and demand in Q3. Now we have very stable prices during this time in Mexico. We expect this to continue during Q4. Q4 has always been a stronger quarter for Mexico with the festivities. We don't know at which point that will be reduced because of the COVID-19 restrictions. We're seeing some increase in cases in Mexico.
There could be some more restrictions in the Q4, but given the supply and demand situation that we are right now, the results are sustainable. For Q1, we expect the industry to increase production to adequate supply and demand and the return to more normal levels. Mexico is really volatile quarter-over-quarter again, but we expect to be very stable year-over-year. Our strategy is supportive of the growth to increase the higher margin differentiated products as well. We saw a little bit of impact in the prepared foods, especially on the more affordable products during Q1, but we continue to invest and the highly differentiated Pilgrim's products continue to sell really well. Longer term, despite the volatility, Mexico is a growing economy, and as the population increase their disposable income, it leads to a significant growth in protein consumption.
Great. I really appreciate that answer.
Thank you, Ken.
The next question is from Ben Bienvenu with Stephens Inc. Please go ahead.
Hey, good morning.
Hi, Ben.
I want to ask, you touched on in your opening comments with ASF in China and Germany. I want to ask on Germany more specifically. I would think that's a nice boon for the Tulip business. Just curious on what you're seeing in that business, both as it relates to the impact on the domestic market and then an uptick in potential demand from that market as well, and how you think you're positioned to capture that benefit.
Thank you, Ben. The operations in Europe are more focused on the retail. We produce most of our products in U.K. for the retail U.K. market. Because of the high welfare, we command a premium in that region. The big competition, as you refer, is on the food service sector of imported products from Poland and Germany mainly, and Spain on the pork side. As the Germans had these issues with their production and because of the ban in China, it actually increases the sales in the U.K. market. It also creates the opportunity for our U.K. products to be sold into China.
What we saw is that on the what we call fifth quarter products, a significant increase in pricing, but on the normal products like loins and others, we see the prices more stable because it's a zero-sum game at the end of the day. It increases the opportunity to China. That was welcome. I think our sales have, like we mentioned, have doubled during Q3, and we're seeing some very stable pricing. It also includes the competition in the food service segments in U.K.
Okay, great. My second question is related to grain, and apologies if I missed this in your opening comments. I did hear your overview of the market. Could you talk about how you're positioned relative to the markets? Are you more hand-to-mouth at the moment? Do you have any basis secured? Any color you could offer there on how you're positioned through the balance of fourth quarter and into next year would be helpful.
Hey, Ben, this is Joe. Thank you for the question. Obviously, we've seen prices of corn and soybean meal increase in the last few months, which has been the result of a few factors. For corn, we've seen a reduction from the supply side, with USDA reporting 6 million fewer planted acres than they originally estimated back in March. We also saw our final stocks for 2019 end up being 200 million bushels less than was expected when the final counting was done. On the current crop, we actually, for the acres that were planted, see pretty good yields, above trend line yields, so it's not an issue on the supply side in terms of U.S. production. On the demand side, we've also seen much bigger export demand, primarily driven by China.
The USDA is projecting a carryout of around 2.1 billion bushels, and that includes a 30% increase in export demand from last year. Even if export demand ends up higher than what USDA is projecting, corn stocks should still be in line with previous years. On soybeans, USDA is projecting a 290 million bushel carryout, which would be the lowest carryout in five years. This projection, though, includes a 31% increase in export demand driven by China. In addition to increased export demand, Argentina, which is one of the world's largest oil seed exporting countries, is in the midst of a historic economic crisis, which is causing farmers there to hold back available supplies from the market, adding more pressure to the U.S. to meet this demand.
We believe the market is likely to feel anxious about U.S. soybean supplies until there's a resolution to this currency situation in Argentina, or until South American supplies can be available to meet this demand. In terms of how we're positioned, we've always said that our hedging strategy is adaptive to the market conditions and the risk we see, and we feel very comfortable with where we are in corn and soy. We do recognize the risk to soybean supplies in the U.S., and our positions reflect that.
Okay, awesome. Thanks, and best of luck.
Thank you, Ben.
As a reminder. The next question is from Michael Piken with Cleveland Research. Please go ahead.
Yeah, hi. Good morning. I just wanted to touch base a little bit more in terms of the move, I guess, into retail. Some of that big bird product, is that being chopped up and put into trays? How is that impacting some of the margins on the commodity business?
Mike, there's a lot of product from the big birds, especially during promotional seasonality during the summer, that from the big birds end up being put in a tray to be sold in the retailers. We continue to do that. I think the challenge to the industry is that we need to have the labor available and the facilities available to do more of that, and that's why the industry has not increased more the production to the tray pack as we want or as the demand continues to grow. It's also because of that we are increasing the capacity in our Minnesota plant. As of today, yes, we are buying big bird meat, and we continue to put it on a tray, especially during Saturdays, and I think the whole industry is doing that.
Okay, great. My second question is, You mentioned that your absentee rates are starting to go down and you're starting to get back to your normal mix. In terms of some of the deboned dark meat, are you starting to return that to historic levels? What could that mean for the leg quarter prices, which have seen the most pressure? Can that help? Is this the fact that China is taking more pork? Can that help with leg quarters? I mean, why haven't leg quarter prices moved if there's more deboned dark meat potentially being produced? It seems like at the very least, China's taking more U.S. pork.
Yes, you're right, Mike. Because of the absenteeism and also the food service industry in U.S., the industry produced 3% more leg quarters in July and August than the same period last year, despite a lower total production. That put a lot of pressure in the leg quarter pricing. As we are seeing more the reopening of the food service and as we are seeing the absenteeism and the staffing of our plants increasing, for us and for the whole industry, we are seeing more deboning. We are already at levels comparable to last year in terms of deboning, which will reduce the pressure in the leg quarters. Of course, China has been also more active in the leg quarter market over the last month, and we're seeing that in the leg quarter inventory that was up on a sequential basis up to August, but we are seeing a reduction.
Also the inventory today is down 9% compared to the peak Q1 average that we had. Those two factors can contribute to the reduction in the leg quarter production, which is a commodity item, as you mentioned. The China interest, I think we saw over the last weeks, although not today, the increase in the oil prices and the reduction in the dollar, which increased the availability of dollars from the developing countries, which also increases the demand for leg quarters. What could help on the leg quarters going forward is both on supply and demand. On supply is exactly what you said, less leg quarters because of the improvement in labor efficiencies and the more sales in the domestic market on the food service and on demand because of low prices and because of more available income in the developing economies.
The next question is from Peter Galbo with Bank of America. Please go ahead.
Hey, guys. Good morning. Thanks for taking the question. Fabio, as I'm thinking about it, the small bird and retail channels obviously have been tremendously profitable for you guys during this time period, and with the plant conversion coming. With commodity big bird remaining in the cutout value you have here remaining under such pressure, just at what point does it make sense to start talking about converting another plant, whether that's to retail or to small bird? Because it just seems like that big bird portion is not going to improve without more capacity either being converted or taken out of the market in some capacity.
Sure. Thank you, Peter. I think the decision to convert the plant is a more long-term decision, and we always make those decisions combined with our key customer strategy. As we see the demand of these key customers growing, we take action in our portfolio. That makes a lot of sense for us to do that conversion right now from that operation from big bird to small bird to support this growth. I think, again, you need to look into a more broader long-term perspective. We continue to expect the food service sector to rebound. If you look at the food service sector today, the food service restaurants are down 13% year-over-year, and that is impacting the big bird deboning for sure, while the QSRs are up 9%.
As we go to a more normal operation, as we see maybe the development of vaccines, we don't know when that's going to happen, or we see more openings of the restaurants. We expect the food service restaurants, especially on the full service, to regain some market share that they are not operating today. I think it's a long-term decision, and it's also a very difficult decision to move from big bird to a smaller, because we have the growers and we have the feed mills. It's all built to that specific bird. Our plants in the United States are really customized to that specific segment. Any conversion, it really requires significant capital and requires some significant changes in the overall supply chain, both starting from the growers, your feed mills, and your field operations.
It's a high capital investment that needs to be supported for the long run. That's why we don't see a lot of conversions in our industry. Of course, if this situation continues for a longer period of time, you can see some conversions. I think also it's important to know that some other players don't have the key customer relationships that we have, and moving from the big bird to the small bird or to the case-ready require a customer, and a key customer to support. Since they don't have those relationships, it's harder for them to do some conversions.
All right. No, that's helpful. Then maybe just to follow up, given where the balance sheet is now and something you talked about in your prepared remarks, how should we think about M&A potential, maybe from a geographic perspective? Does it make sense to get bigger in pork in Europe and going into 2021? Just any help there, and then maybe you can also comment on any updates on your CFO search. Thanks very much.
Sure. In terms of strategy, I think our strategy continues the same, and our growth strategy continues intact. As we mentioned, we have a very strong balance sheet. We look into increasing our prepared foods operation and our branded operation to create a more balanced portfolio. We are also looking for chicken assets where we can extract more value from operational efficiencies. We're seeing targets both in U.S. and outside U.S., geographical diversification, and to growth in Europe. We will evaluate all alternatives to our value creation standards. In terms of the CFO, we are in the process of finding another CFO. We already engage recruiting firms, and we should have some news in the near future.
Great. Thanks very much, guys.
Okay.
The next question is from Adam Samuelson with Goldman Sachs & Co. Please go ahead.
Yes, thank you. Good morning, everyone.
Morning, Adam.
All right. Maybe first just a clarification or a little more detail on the expansion of the Minnesota plant for case-ready and the conversion of the Texas plant small bird from big bird. What's the net impact on your production volume? What's the capital cost of those projects?
Yeah. In terms of total volume, I think we should be just a little bit up. We expect to grow in line with USDA expectations and the industry for 2021, which is a little bit lower than 1%. As we have more birds in Minnesota, but we also reduce the weights in our operation on the big bird that we are transforming to a small bird. We expect to be, for 2021, in line with those two. In terms of investment, it's not very significant to our total CapEx, as the conversion of the small bird plant, it's a simpler conversion. Of course, that QSR requires some DSIs, which is portioning equipment and some marination equipment. We're going to invest in automation in that plant as well. Today is a manual deboning operation, and we're going to invest in the automated deboning.
The investment is close to $20 million-$25 million in that operation. In the case of the Cold Spring operation, it's close to $70 million. Overall, it is a total of $100 million that we're going to invest in those two conversions.
Okay, that's helpful color. Then the follow-up was, I just want to make sure I heard something right from the prepared remarks. You talked about the prepared food business in the U.S. declining 26%, I think is what I heard. Maybe hoping just to expand on that. That's a business that I think has had a bit more challenges over the years and just, is it really just a question of returns of school and food service traffic? Or how do we think about that business or margin profile moving forward?
Yeah, Adam Samuelson, that's exactly it. In our prepared food business, we have a strong brand, which is the Pierce brand, that is mainly a food service brand. We also are very strong in the school with our Gold Kist brand. Both those segments are the ones that are most affected by the COVID-19. The non-commercial food service, that includes schools, were down 66% at Q2, and now they are down 43%. We are seeing some school reopens, which could help, but it's a segment that is still down 40%. What we call the commercial food service, which is the street business where our Pierce brand is a leading brand in wings and in chunks, we saw that in Q2, they end up 36% lower than the prior year, but they're rebounding, today they are close to 4% lower than the same period last year.
The food service business has been recovering, and with that, our Pierce brand has recovered and our volumes. The school system is still close to 40% lower than the prior year. That's why we're investing in more retail branded business. As we mentioned, our Pilgrim's brand has increased more than 30%, and we have been very successfully expanding Just BARE brand in the fresh category, that has been very successful on the online segment and also on the higher attribute segment in our key customers to the prepared food segment.
All right. Great. That's helpful color. I'll pass it on. Thank you.
Thank you, Adam.
The next question comes from Carla Casella with JP Morgan. Please go ahead.
Hi, my question's regarding your leverage. The three times target, how comfortable or how high would you be comfortable taking that in the event of additional M&A? Are you seeing any more M&A opportunities just given the volatility in worldwide protein markets?
Yeah. Thank you, Carla. We set these targets of two to three times because it's the best capital structure that can protect and reduce our interest payments while not creating any problem for our bonds and for our leverage. The two to three times is in normal operations. Of course, during some acquisition, if we have a great plan on how to reduce that back, we can go further. I don't think there is a number that is specific on where we go. I think it's more about what is the plan to deleverage. Of course, the plan to deleverage could include the issue of stock.
That's why Pilgrim's, as a public traded company, has that opportunity to use the stock as a currency, not to increase the leverage to points where we don't think it is prudent in the case of a significant acquisition that will be transformational for the company.
Okay. Just one last one.
No, sorry. In terms of M&A, yes, we are seeing more targets. Of course, the whole situation about traveling has created some challenges in terms of seeing and visiting assets. We're seeing some targets that are still very interesting to us and could create a lot of value for our shareholders.
Okay, great. Just in the event that JBS is able to list the U.S. business, would that cause any need for a change in your structure?
Yeah, we don't believe so. I think JBS has said many times that they continue to support Pilgrim's to be a public traded company. Just as I mentioned, it is a great way for us to keep our growth. We can use the equity as a currency in the case of a very important and transformational event for Pilgrim's.
Okay, thank you.
Gentlemen, there are no more questions registered at this time. I would like to turn the conference back over to Fabio Sandri for closing remarks.
Well, thank you all. We would like to reiterate our continued commitment to our valued team members to provide them with a safe and healthy work environment while supporting our duty to maintain food production and supply to customers. We are looking forward to closing 2020 with good results in spite of the volatility. Our diverse portfolio of differentiated products tailored to support our key customer strategy, in conjunction with our broad geographic footprint, will continue to generate consistent performance and minimize margin volatility in challenging market conditions relative to competitors. We will continue to seek new growth potential, both organically and through acquisitions, while offering even more differentiated products portfolio within our business to support key customers' needs by cultivating a culture of constant innovation. We would like to thank everyone in the Pilgrim's family, including our family farm partners, suppliers, and our customers who make our business possible.
As always, we appreciate your interest in our company. Thank you for joining us today.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.