The U.S. broiler industry’s super cycle of profitability, which began in 2013 with falling grain prices and production cutbacks, has run its course. A profitable run of historic proportions for U.S. broiler producers won’t necessarily end in losses in 2016 but margins will be squeezed thin, in part, by mounting protein supplies brought on by chicken and pork industry expansion.
Chicken companies that were until recently racking up 5 percent to 7 percent margins on sales will be lucky to achieve 1 percent to 2 percent in 2016. That’s assuming year-over-year production increases, which were running around 4 percent until late summer 2015, stay below 2 percent.
“U.S. broiler producers are facing a tough slough in profitability in 2016.” – Thomas Elam, FarmEcon
U.S. broiler producers putting brakes on expansion
Beginning in late July and early August of 2015, the broiler industry began to put the brakes on production expansion. Lenders to chicken farmers on contract to integrated broiler companies say expansion of grow-out capacity has been amazingly high in 2015. Bankers for the integrated broiler production companies report their clients haven’t needed much outside capital to finance expansion of processing capacity. Broiler producers, who are flush with cash, fund their own expansion projects. One lender said he has never seen such strong balance sheets in the broiler industry.
Now, however, industry expansion and rising protein supplies are weighing on profitability. Further eroding the U.S. domestic market for chicken are the rising supplies of leg quarters which normally would be exported but are not making it overseas due to trade restrictions resulting from the outbreaks of highly pathogenic avian influenza (HPAI) earlier in 2015.
U.S. exports take big hit
While the HPAI outbreaks occurred almost entirely in turkey and egg-laying flocks, the impact on exports has been significant, according to Nan-Dirk Mulder, senior global animal protein analyst, Rabobank.
“There is weak demand for U.S. broiler exports, which may be down 10 percent due to the trade restrictions that have resulted from the HPAI outbreaks,” he said.
“The U.S. broiler industry lost market share in exports due to trade restrictions, and international competitors have taken over the position of U.S. exporters in some markets, especially in China. Brazilian poultry producers, in particular, have jumped at this opportunity. U.S. broiler producers have similarly lost market share in Russia. In theory, markets closed to the U.S. due to the HPAI outbreaks can reopen, but it would take time. In reality, competitors to the U.S. poultry industry have taken these markets and created positions for [themselves]. Brazil has been the big winner here.”
“The U.S. broiler industry lost market share in exports due to trade restrictions, and international competitors have taken over the position of U.S. exporters in some markets, especially in China.” – Nan-Dirk Mulder, Rabobank
With localized shortages of poultry around the globe, the world trade in poultry has increased and become more important. That’s positive for the countries that have access to the markets in short supply, but U.S. poultry producers are missing that opportunity at the moment.
“The export market that poultry producers are looking into for 2016 is China,” Mulder said. The outbreaks of HPAI in poultry in the U.S. – and the resulting trade restrictions – are having a global impact, including in China, where there may be a relative shortage of poultry and pork and an increasing need for feedstuffs for these food-production animals.
Avian flu in U.S. has global impact
The potential global impact of any HPAI outbreaks that might occur in poultry in the U.S. in 2016 is difficult to predict. Should HPAI infect flocks in the southeast or on Delmarva, the trade impact could be huge. As long as any resulting trade restrictions are placed on a county or state basis and the disease is not widespread, the impact would conceivably be manageable. All the potential disease and trade scenarios, however, are difficult to predict.
Winners and losers amid this uncertainty are not easy to predict. For example, the outbreaks of HPAI in 2015 resulted in profit windfalls for those turkey and egg producers whose production was untouched by the HPAI outbreaks.
Amid the uncertainty about disease and trade restrictions, the strong U.S. dollar continues to dampen U.S. trade prospects in poultry.
Brazil’s poultry producers benefit
Bright prospects for Brazilian poultry exports are forecast by Fausto Ferraz, Cobb-Vantress business director for the country.
“Exports gained steam in the first quarter and are likely to continue growing,” he said. “The export record of 440,000 [metric] tons in July shows an even better prospect for the external market. We may finish 2015 at 5 million tons exported, which would result in less poultry meat for the domestic market.”
Fausto Ferraz points to one of Brazil's competitive advantages in the global market — the health status of its birds, contrasting with avian influenza outbreaks in other regions of the world.
“Because of the excellent health status of our birds, the chances of gaining new markets remain favorable,” he stated. “As a result of recent AI outbreaks, many countries impose import bans to avoid the spread of the disease, giving preference to suppliers in regions without any disease outbreaks.”
Within Brazil, the first quarter of 2015 was marked by breeder placement similar to the same period of 2014, but with a slight increase in broiler chicks.
"We believe that the second quarter will remain equally stable. Beef, which is a natural competitor to chicken meat, does not show signs of any price decrease, and so chicken meat should continue to be the choice of the Brazilian consumer.”