The international competition in poultry exports is vital to the future success of U.S. poultry producers. That’s because demand for poultry is growing in the world’s developing economies but not in the U.S. Even for those producers not directly involved in exporting it is essential because U.S. markets will rise or fall on the influences of foreign demand. What’s more, because demand for poultry is shifting to grain-deficit regions of the world, trade will become more important.
Poultry producers in Brazil and the U.S. are the world’s top exporters, but the list of competitors is growing – as is the complexity and fierceness of the competition.
Banker’s view of the competition
“We know how fierce the competition is among poultry companies, but no wonder,” said Adriaan Weststrate, global co-head of Rabobank’s Animal Protein Sector, as he began a presentation to members of the USA Poultry & Egg Export Council by reading from the Smithsonian Magazine article, “How chicken conquered the world”:
The chickens that saved Western civilization were discovered, according to legend, by the side of a road in Greece in the first decade of the fifth century B.C. The Athenian general, Themistocles, on his way to confront the invading Persian forces stopped to watch two cocks fighting and some of his troops saying, ‘Behold, these do not fight for their household gods, for the monuments of their ancestors, for glory or liberty, or the safety of their children but only because one will not give way to the other.’ It does not describe what happened to the loser nor does it explain why the soldiers found this display of instinctive aggression inspirational rather than pointless and depressing. But history reports that the Greeks, thus heartened, went on to repel the invaders, preserving the civilization that today honors those same creatures by breading, frying and dipping them in one’s favorite sauce.
The competition for the poultry export business may be fierce, but the future is bright for the competitors, Weststrate told listeners at the USA Poultry & Egg Export Council meeting. “I sincerely believe that there is no better business to be in than the food business. The production of animal proteins is absolutely a fantastic business to be in, if you are able to execute on the opportunities that exist around the world.”
Global battlefield for sales and profits
The U.S. is taking share (from a low base) in key markets from Brazil, according to Weststrate. For example, the U.S. compound average growth rate in the last six years to Saudi Arabia, Japan and Hong Kong is growing faster than for Brazil. At the same time, however, the U.S. exports have grown slower in China, Japan and Kuwait.
Brazil’s exports to China have increased as U.S. exports there were shut out. “The Brazilians have almost taken over the China market from the U.S. since 2009. In 2012, we expect there to be almost 300,000 tons of poultry meat going to China. There are roughly 65 Brazilian plants approved for export to China. There are a log of leg quarters and especially wings going to China from Brazil,” he said.
Near-term, Brazil will remain the biggest competitor for the U.S., Weststrate said. Over the longer term, Russia and Ukraine will become bigger factors. He predicted that Ukraine will become an important export competitor, especially to markets in the Middle East, and eventually to Europe.
Export competition grows in complexity
The competition in poultry exports is not just about productivity anymore. It’s more about how companies and industries manage a host of issues including currencies, transportation costs and market access.
Weststrate, whose bank has $15.5 billion in commitments to global animal proteins businesses around the globe, outlined for the U.S. poultry exporters the fight they face against challengers in Brazil, Argentina and at least five other nations. But the toughest competition is with Brazil, which enjoys edges in cost of production and state-supported financing.
What is it to be competitive? The good news is that the U.S. is a grain surplus country and a low-cost animal protein producer. But more is involved in competitiveness today.
“In the past, poultry industry competitiveness was linked primarily to productivity in things like feed conversion ratio, days to maturity and yield. The business is now more complex,” he said.
New complexities involve risk management and other factors. At what price is corn purchased? Is the supply chain secure, especially in developing countries like China? How much say will NGOs and the government have in the business in the countries where you operate?
Brazil executes better than the US
The requirements for successfully executing against the growing poultry export opportunities are changing, according to Weststrate, and Brazil’s poultry industry is doing a better job of this than the U.S., he said.
“I think that Brazil’s poultry industry is doing a better job, in general, in executing on the export opportunities than is the U.S. industry. That’s not just because of the U.S. industry but because of the [lack of] political support it receives from Washington,” he said.
Government support in Brazil
The Brazilian industry, by contrast, receives better support from its government, he told the U.S. group. “Until a few months ago, the U.S. poultry industry was well on its way to being a lower-cost producer of poultry than Brazil’s industry. This was simply because the economy in Brazil is doing so well and as a result is for the third year in a row experiencing double-digit increases in labor costs.”
The Brazilian government, in fact, was not satisfied to stand by and see poor profitability and deteriorating competitiveness of its agricultural sector. So, it intervened in currency markets to drive Rea-to-U.S. dollar exchange rates from around 160 in 2011 to around 190 in 2012.
“At that exchange rate, Brazilian companies are profitable and very competitive. So, from being disadvantaged sometime last year, Brazilian companies have come back with government help. It shows. In Brazil, the government really does give help to the agricultural sectors just to make sure that they keep competitive on the export markets,” he said.
Support from Brazil’s Development Bank
High labor cost isn’t the only disadvantage faced by the Brazil poultry industry. It also faces a high cost of capital. Again, however, the government provides support. The Brazilian Development Bank, which is a federal public company associated with the Ministry of Development, Industry and Foreign Trade, is there to provide long-term financing at favorable rates to major poultry companies and for projects that improve overall competitiveness.
Managing all the issues
“It’s not just about productivity anymore; it’s more about how you manage all the issues,” Weststrate reiterated.
He offered the following conclusions for the U.S. poultry exporters at the USA Poultry & Egg Export Council meeting:
- U.S. chicken companies will need to rely more on exports as the domestic market matures.
- The U.S. has key advantages with a large domestic market and plentiful feed supplies.
- The biggest competitor for the U.S. is Brazil, which is facing rising labor costs, in addition to having weak infrastructure and high capital costs.
- The U.S. needs to do a better job of customizing its product for import markets and not just sell chicken leg quarters to whoever will take them.
As poultry meat demand shifts to grain-deficit regions, trade will continue to increase, Weststrate concluded. He predicted that by 2020 the poultry trade will be 12 million tons or 17 percent of global production.