A Deloitte survey of executives across all types of businesses showed they do not expect today's higher level of volatility and risk to subside any time soon. Many are concerned it will increase. Two-thirds of respondents said financial risk has the potential of increasing in the next two years.
Poultry producers have the same concerns. A recent WATT PoultryUSA survey showed that U.S. poultry executives not only believe the level of risk facing their firms is higher today, they believe the risk is significantly higher. That's understandable given the number of bankruptcies and acquisitions that have occurred in the U.S. broiler business in the last five years.
Risk in the poultry business is higher, and this is changing the U.S. broiler industry ... and it has implications for the world poultry industry, too.
There are a greater number of U.S. broiler firms today with business models that are multi-protein (chicken, beef and pork) and transnational. There are also more broiler firms that are owned by food companies, for whom poultry production is a form of backward integration. What's more, there is a rise in the importance of financial management on a strategic level on the part of the owners of the largest poultry firms.
Competitiveness, plus risk resilience
Least-cost production and the drive for efficiency or competitiveness has been the mantra of poultry companies since the beginning of the modern poultry industry in the 1950s. And that focus has grown ever stronger over the years. But too singular a focus on cost and efficiency can actually pose a serious risk. It can leave a poultry company blind to risk at a time when the risk is higher than ever ... that can have catastrophic financial consequences.
So, in today's higher risk business environment, poultry companies can't afford to be any less focused on efficiency or competitiveness. However, they must change their business mantra from "efficiency, efficiency, efficiency" to "efficiency plus risk resilience." If a company doesn't survive a risk event, it doesn't matter how competitive it was.
US broiler company executives identify biggest challenge
In a WATT PoultryUSA survey conducted in August, U.S. poultry executives said the risk facing their companies is not just higher but significantly higher today than 10 years ago.
U.S. poultry company executives ranked the risks facing their companies, and the number one risk, far and away, is "grain/commodity prices/availability."
Why does risk associated with "grain and commodity prices" worry executives the most? Here's what one broiler executive said: "Food safety and biosecurity are no less important to us than grain prices -- quite the contrary, they are our most important areas in managing risks. Food safety and biosecurity, however, are not the greatest risks to our revenues and bottom line, as we have a greater degree of control over each of them. Managing risk in areas over which you have little influence or control is what will keep you up at night."
Trade interruptions, food safety and biosecurity
The risk ranked second highest by the poultry executives was "trade interruptions/market access/currency valuations." While this risk may have materially impacted industry profitability over the years, it has not been associated with the high number of business failures as has grain prices in the past five years.
Similarly, the risk rankings reflect the fact that even though food safety, biosecurity and regulations pose serious concerns, these risks have not resulted in such industry-wrenching change as that caused by grain prices.
Other risks of significance to the poultry industry
-The poultry executives identified a number of other risks able to significantly degrade revenues and/or net worth.
- Supply/demand imbalances and unprofitable poultry prices
- High unemployment and lack of demand for poultry
- Lack of availability of adequate authorized labor
- Product recalls
- Pathogen requirements that are not attainable
- Attacks on the poultry industry by non-governmental organizations (NGOs)
Risks of potential significance in the future
The survey respondents identified risks on the radar, but not yet significant:
-Food company (customer) consolidation
-Credit risk/cost of capital
-Imports of chicken into the United States
-Regulatory/legal challenges
-Inconsistent application of laws/regulations
Why risk facing poultry companies is greater
The risk level, overall, is significantly higher because of several reasons, according to the executives surveyed:
-Volatility in grain markets is greater
-Government regulation has increased
-There is less understanding of agriculture on the part of consumer and the media
-Poultry companies are larger and more complex
Is the world riskier for poultry firms today? Consider what has happened in the past five years. Ten of 38 poultry firms in WATT PoultryUSA's broiler rankings entered bankruptcy or were acquired since 2008. Thirty-four percent of industry production changed ownership over that five-year period. Companies of every size were involved in these events.
"What is different is the need to be bigger and have deeper pockets, to have the financial backing to easily survive the ups and downs of the grain and chicken market and achieve the appropriate marketing economies of scale," said poultry industry consultant Dr. Paul Aho. "It looks like the way to do that is to evolve away from the single-protein model. Even the multi-protein model may not work in the long run; companies may have to be food companies."
Does this mean that risk management needs to be elevated as a strategic priority at poultry companies? What risk management strategies are available to poultry firms? The answers to these questions and the solutions are different for each firm. However, the trends are becoming clearly defined and need to be factored into your poultry business strategy.
Risk and the poultry industry's future
While there may not be a single 'best' risk profile for poultry production, following are major trends with which poultry firms must deal in the future.
There are more multinational, multi-protein producers. These include the following:
-U.S. based and No. 1 ranked broiler company Tyson Foods, which produces chicken, beef and pork
-No. 2 ranked Pilgrim's Inc., which is owned by JBS of Brazil, and produces chicken, beef and pork
-No. 15 ranked O.K. Foods, which is owned by the Mexican beef, chicken and pork producer Industrias Bachoco
Backward integration by food companies also figures importantly in the U.S. poultry industry ownership. This includes the following firms:
-No. 11 ranked Keystone Foods, which is owned by the transnational food company Marfrig
-No. 13 ranked Amick Farms, which is owned by the U.S.-based transnational food company OSI Group
Nonetheless, there are well-managed and financially secure firms engaged in national and/or single-species production. What's more, niche production (specialty, authentic, natural, etc.) is a viable poultry business model.
The point is that all kinds of firms can be successful in the future, but the larger, multinational, multi-species firms have a larger presence than five years ago.
New risk in developed industries and markets
Finally, some regions of the world once thought to be the least risky are now looking more risky. Consider the turmoil in finances and ownership in poultry companies in the United States and Brazil in the past five to 10 years.
What's more, the transnational, or multinational, business model has not yet proven to be a key to future success in the poultry business.
Industry consultant Gordon Butland has doubts about the "cross-continent" strategies in the poultry business. "Although there are very good strategic reasons for these, not many companies can show good returns on the considerable resources that have to be invested. Even the CP Group has lost considerable amounts of money in its 20-plus years in China. It will be interesting to see how Cargill (a true multinational) progresses in China."
Financial engineering comes into play
Geography seems to be playing a less important role in poultry business strategy than other elements.
As Butland explained, " In some of these companies today, their annual report and financial statements take up more space with financial transactions than operations."
He points to what he calls the "new protein world" which is post-ethanol and the financial crisis of 2008 and the poor corn harvest of 2012.
"At the same time we saw the birth of the two new players, JBS and Marfrig. In 2004 JBS revenue was $800 million and now well over $30 billion. Marfrig went from $1 billion in 2006 and made 39 acquisitions to swell to over $13 billion in five years. Both had considerable support from the Brazilian development bank BNDES. Then as a result of the global financial meltdown, Perdigão and Sadia were forced to merge to become Brasil Foods -- BRF," Butland said.
Paul Aho sees a four-stage progression of business models evident in the new risk environment. The progression is from single-protein to multi-protein and from food company to the financially engineered multi-protein producer.
"Ultimately, even food companies may evolve into investment entities," he said. "The purchase of Smithfield was not done by a Chinese pork company but rather by Shuanghui International, an investment entity which happens to also own a stake in a large, Chinese pork company. Some single-protein companies will survive, but the trend is the other way."
The poultry business opportunity today
So, what is the risk profile for the future? Cost competitive plus risk resilient!
The business opportunity today for poultry producers is different than five years ago. Today's opportunity is in making risk management an enterprise-wide approach to effectively manage the spectrum of business risks in a way that enables sustainable, long-term growth.
Risk management must start at the top of the organization and go to the bottom of the organization. It is more than a prescriptive set of best management practices at the operational level.
It is important to note that crisis management is not risk management. Crisis management is needed when risk management fails. A company needs to be prepared in both of these things. But, of the two, only the proper management of risk is going to set the foundation for sustainable, long-term growth.
Poultry supply chain's unique challenges
Successfully managing risk in the poultry industry involves more than the strategic decisions discussed in this article. Consider the risk challenges faced by poultry firms in the supply chain:
-Supply chain length and complexity
-Competencies required (everything from veterinary science to forecasting demand)
-Time span (the time from breeder placements to processing and delivery to the customer)
-Risk of downstream surprises (a product thought safe and wholesome could have one pathogen cell that multiplies due to mishandling in transport, storage or preparation, that renders it unsafe)
-Pathways for risk transmission
-Economic (cost and quality of grains; these flow downstream, all the way to the consumer)
-Biologic (the potential for risks from disease, foodborne pathogens flow downstream)
-Social dimensions involving food safety, animal welfare (these risks are huge and have serious, long-term implications)
Risk exposure abounds in the poultry business
Macro environment risks that have potential impact across the entire supply chain include the general economy and consumer demand, and things like the regulatory environment under which all businesses operate. Think about all the risks that involve economics, environmental/social responsibility, those that are geopolitical, or ones that involve hazards from earthquakes, terrorism or the weather.
Extended value chain risks include upstream risks in the supply of breeder stock for the poultry company or nutritional and pharmaceutical supplies to help keep flocks healthy and productive. Downstream risks include your relationships with customers, and even how the consumer stores, prepares and eats poultry products.
Operational risks that relate to internal process risks would include breakdowns in food safety procedures that allow products contaminated with foodborne pathogens to reach consumers.
Some of these risks crossover the categories; take, for example, droughts in the U.S. that not only have caused water levels in the Mississippi River to fall below navigable levels (which temporarily prevented the delivery of grains by barge to some U.S. poultry firms and temporarily stopped the flow of grains through New Orleans to customers overseas). The same droughts -- along with U.S. regulatory policies mandating the use of huge amounts of corn to produce ethanol for gasoline -- helped drive up the cost of corn and essentially put a number of U.S. poultry companies out of business.
Just thinking about what has happened in the past five years is enough to keep poultry company executives awake at night, let alone what can and will happen in the next five years. Even if managers were able to know ahead of time what risks will occur it would be a difficult job to prepare. But they don't know, and that makes the job of risk management a big challenge.
