The largest chicken and meat producers in the U.S. have become accustomed to ruling the roost. In 2015, a total of just five companies produced nearly 60% of the United States' ready-to-cook chicken. These companies are Tyson Foods (NYSE:TSN), Pilgrim's Pride (NASDAQ:PPC), Perdue Foods, Sanderson Farms (NASDAQ:SAFM), and Koch Foods. These giants are also vertically integrated, meaning they control nearly the entire supply chain for poultry, from feed mills to the slaughterhouses and trucking lines for delivery and distribution. The only part that is outsourced is the farms where the chickens are grown.

Technically speaking, this would make these listed food companies some of the best food stocks to own, due to their oligopolistic power, scale, and control of the billion-dollar industry. But with that power and control has also come controversy.

There have been allegations in recent years of price-fixing among three of the five companies. This isn't the first time that these firms (which control around 90% of the broiler market) have been accused of colluding to fix prices in the $30 billion industry.

Investors may wish to tread carefully when it comes to these meat producers, as they are not just facing serious allegations regarding their conduct, but have also been accused of unethical practices such as the mass killing of day-old male chicks that are considered "useless" as they will not produce eggs, as well as the injection of tons of chemicals and antibiotics into chickens to fatten them up before slaughter.

Aside from these disturbing facts, there are two other major factors that could signal tougher times ahead for chicken producers.

Chicken Alongside Chicks

Image source: Getty Images.

Shift to plant-based proteins

Unless you've been living under a rock these past few years, it's hard not to notice the explosion of interest in plant-based food products. The healthy living trend has gained renewed momentum with a focus on plant-based proteins replacing meat-based ones, and this also conveniently tackles the issue of cruelty to farm animals. In fact, global consultancy firm AT Kearney has gone so far as to boldly predict that by 2040, 60% of the meat people eat will not come from slaughtered animals, but will be grown in vats or be totally replaced by plant-based foods that both look and taste like meat.

The hype has also seeped into the valuations of companies such as Beyond Meat (NASDAQ:BYND) and Impossible Foods. The last check on valuations showed that Beyond Meat trades at a forward price-to-earnings multiple of 232, lofty by any standards, while Impossible Foods has reportedly doubled its private market valuation to $4 billion in a recent fund-raising round.

If this shift to plant-based products gains further momentum, it could spell serious trouble for poultry and meat producers, as demand for meat-based products would decline precipitously. However, the chicken producers are not sitting ducks either, as Tyson Foods had recently ventured into the fake food business with a pea-based chicken nugget alternative.

Avian influenza

Avian influenza, also known as bird flu, is a viral infection that can infect not only birds but also humans and other animals. The first outbreak was recorded back in 1997 in Hong Kong and was linked to the handling of infected poultry. The virus was termed H5N1, and though it mostly occurs in wild waterfowl, it can easily infect domestic poultry.

Recent pork shortages in China caused by swine fever have led to increased backyard farming of poultry, raising the risk of a deadly bird flu pandemic. If there should ever be a major outbreak of avian flu, the poultry producers would have to engage in a mass culling of their livestock. This would lead to a sharp and significant impairment loss hitting the poultry producers' books, while the abject fear associated with poultry consumption could linger for many years to come.

Though such a scenario may seem unlikely, it is precisely this type of black-swan event that may cause the downfall of all the players within the poultry industry.

End of the world or just the new normal?

The industry is not about to enter a death spiral just yet. Potential investors should, however, factor into their decision these issues and others, including rampant allegations of price-fixing that all players continue to vehemently contest and deny. These calculations are a normal aspect of an oligopoly where market share is concentrated in just a few players. Pending the outcome of the price-fixing litigation, for example, I believe the companies involved will probably get away with just a large fine, which will effectively be a slap on the wrist for them.

Note too that the two scenarios described above are "worst-case" ones. As mentioned, Tyson Foods has already begun experimenting with plant-based products to better take on this new competition, and other chicken producers could follow suit soon. This implies that the industry is ready to evolve and cater to changing tastes and preferences rather than doggedly sticking with their current strategy. A killer virus may sound catastrophic, but its probability is low and advancements in medicine and biotechnology would probably mitigate the worst effects of any severe outbreak.

Chicken producers are facing headwinds, but the sector remains a dominant force in the consumer market. Many consumers aren't going to ditch meat products for plant-based ones anytime soon, so growth opportunities for the sector are still in play, even as these companies are confronted with the potential for disaster.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.