The global poultry industry continues to face high feed costs, which are putting margins under pressure in many parts of the world, according to Rabobank’s latest quarterly poultry report.
Profitability swings are an ongoing problem for the industry, and in developed countries in particular, the industry lacks the ability to pass on feed cost increases, said Rabobank. Key factors driving the situation are oversupply, government restrictions regarding plant closures, fragmented industries, inflexible supply chains and pricing models in the value chain.
“The first quarter of 2013 is likely to be challenging as higher feed input costs move through the flocks," said Rabobank analyst Nan-Dirk Mulder. "Beyond that, returns will depend on industry discipline in keeping production sufficiently moderated to get prices higher and offset increasing costs. Weak global performance is urging industry players to rationalize supply base, and non-strategic vehicles are being divested."
According to Mulder, the most challenged poultry industries are currently in the U.S., the EU, Thailand and South Africa, though companies in Russia and Brazil are performing relatively well. "The U.S. has only recently started making supply cuts, and this is also the case for the EU," said Mulder. "South Africa is currently flooded with broiler import volumes from the EU, with sharply falling local prices. Thai production expansion in the last two years has been too fast to be in balance with current market demand. This has resulted in large oversupply in the domestic Thai market and declining revenues in concert with increased feed costs."
The EU is an example of a region that has seen a structural reduction in margins, according to Rabobank. Recent levels have fallen from historic averages of 6–7 percent to 4–5 percent and even temporarily lower during some of the spikes in compound feed prices that have been seen in 2012. In the U.S., there has even been negative EBITDA (earnings before interest, taxes, depreciation and amortization) margins in the industry in times of high feed prices but current margins are slightly higher, although below its historic level. Supply reductions have paid off here, but not yet enough, said Rabobank's report.