Global food companies will control the poultry industry

In the not-too-distant future, all poultry businesses will be global internet businesses or they will not be in business at all. They will, in all likelihood, be food companies, not poultry companies.

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Annie Andre, Freeimages.com
Annie Andre, Freeimages.com

The world poultry industry is not immune to the titanic struggle for and against globalization as well as the unopposed disruption of the internet. It is safe to say that, in the not-too-distant future, all poultry businesses will be global internet businesses or they will not be in business at all. In addition, those global internet businesses will, in all likelihood, be food companies, not poultry companies.

Why global companies will produce the poultry

Poultry companies located in the United States and Western Europe and even places like Brazil and Argentina must face the fact that their local markets are mature. The era of rapidly rising per capita consumption is over in many countries. U.S. per capita consumption of broiler meat, for example, rose from 10 pounds in 1950 to 80 pounds in 2000. No one should expect that U.S. broiler consumption will continue to rise at that rate. Consumption is now 90 pounds per capita and may never see 120 pounds per capita. To be sure, increased value can be added to the same number of pounds but there is a limit to the total number of pounds.

The slowdown in the growth of mature domestic markets will encourage poultry companies to develop a global marketing and production strategy.

The slowdown in the growth of mature domestic markets will encourage poultry companies interested in growth to develop a global marketing and production strategy. The likely strategy is expected to involve a combination of strategic alliances and acquisitions in other countries. There have already been changes in the ownership of the U.S. chicken industry. JBS, a Brazilian company, purchased Pilgrim’s of the U.S., which at the time was the largest U.S. chicken company. It can be expected that just like global automobile companies, global chicken companies will establish production in several countries and market in dozens of countries. They will be big companies; the apprporiate scale of operation for surviving companies is likely to approach 1 billion chickens per year by 2030.

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Globalization and poultry competitiveness

To the extent that globalization is allowed to run its course, investment in new poultry production will increase in those countries that are the most competitive and decrease in those countries that are the least competitive. How is it possible to identify those regions and countries?

International competitiveness is not determined by performance because the technology of the world chicken industry is trending toward convergence using best industry practice. In other words, technology is readily accessible on a worldwide basis. There are not all that many secrets in the poultry industry (the KFC secret recipe notwithstanding).

The important issues in international competitiveness are grain supply, labor cost and local government policies. Since feedstuffs represent the single largest cost of live poultry production, they represent a huge advantage to grain surplus areas and a problem for grain deficit areas. Low labor costs also provide a significant advantage. Grain exporting countries with low labor costs are in a sweet spot for poultry production if the local business climate is friendly.

Is it better for a country to import grain or poultry products? Assuming relatively free international trade in the future (a big assumption), there will tend to be less poultry production in grain deficit areas and more poultry production in grain surplus areas. A concept that is likely to be cast aside is that of self-sufficiency. A more appropriate goal is optimization which may lead to solutions such as being an importer and an exporter of poultry at the same time. Being neither an exporter nor an importer would be a highly unlikely optimization solution.

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Why internet poultry companies?

Leading poultry companies of the 21st century will be internet businesses (think Uber versus Yellow Cab). Businesses need to not only use the internet but become internet businesses. To become an internet business is to coordinate business relations with both suppliers and customers in real time.

The coordination of business relations could be described as the development of a three-way information partnership with suppliers and customers. The partnership is a collaboration dedicated to creating value across a chain of production based on real-time market research and complex number crunching by powerful computers and optimization programs.

The development of web-based relationships may have some surprising effects on the world poultry industry. For example, in countries where the poultry industry is highly vertically integrated, the internet may act as an incentive for some disintegration. It may also create virtual integrations in countries without vertical integration.

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Poultry to be produced by food companies

If Tyson can be considered a bellwether for the future, the recent history of the company shows a company moving rapidly away from being a chicken company. First, the company purchased significant assets in the processing of beef and pork, thereby becoming a protein company rather than a chicken company. This tactic is one adopted by other large multinational companies such as JBS in Brazil, the largest protein company in the world. JBS moved in the other direction from pork and beef into chicken.

Then, Tyson purchased of Hillshire Brands for $8 billion in 2014. That purchase moved the company in the direction of branded protein packaged food and even further away from its origins as a chicken company. In effect, Tyson is becoming a food company. There is no better evidence of that than the fact that the company changed its name to Tyson Foods.

Another intriguing aspect to the recent history of Tyson Foods is the increase in the amount of raw material chicken purchased outside the company. The hassle of live production appears to be not nearly as interesting as the marketing opportunities of further processed products such as the ones brought on board through the acquisition of Hillshire.

Horizontal integration in the poultry’s future?

This sets up the possibility that food companies of the future may engage in horizontal integration at the level of further processing and marketing and discard earlier stages of production. That would, of course, create a business opportunity for specialized firms to provide raw material to the food company in the form of live chickens or perhaps chickens that have gone through primary processing. An internet food company like Tyson could seamlessly coordinate with a new kind of company, an internet live production company, to create a virtual vertical integration.

As goes the broiler industry, so goes the turkey industry through the same development from small companies to giant firms and eventually becoming part of a larger food company. If anything, the opposite is true; as goes the turkey industry, so goes the chicken industry. The consolidation into companies that produce several kinds of protein started earlier in the turkey industry than in the chicken industry.

For the moment, the table egg industry is the outlier in the headlong globalization of the poultry industry. In the U.S., the two egg industry leaders, Cal-Maine and Rose Acre, are unabashed table egg companies with a mostly national market. Around the globe, table egg production may be the last poultry industry to disappear into global internet food companies. In many places where poultry meat production is uncompetitive, table egg production continues to thrive.

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This is the sixth article in WATT Global Media’s 100-year anniversary series, which considers industry structure. The next article in the series will explore nutrition and NIR technology.

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