Antibiotic-free poultry’s broader economic implications

Antibiotic-free poultry production in the U.S. will have economic implications for the country’s consumers and in markets further afield.

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The trend toward antibiotic-free poultry production is likely to have some unexpected and far-reaching consequences.

The U.S. poultry industry is poised to set production records heading into 2017 due to continuing increases in head counts and bird weights. Consumer demand for specialty protein is also a driver of this volume expansion, as it has become a significant factor in the types of birds being marketed.

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This category shift, with a particular emphasis on antibiotic-free (ABF) chicken, has been particularly amplified in 2016, as several fast-food chains have announced their intent to phase out the use of conventional chicken in favor of ABF meat over the coming years.

ABF birds include those for which any form of traditional-use antibiotics – those intended for human use – are being withheld. While a small subset of the market is raising birds without antibiotics of any kind, this does not represent the larger segment of the ABF market. Under this broader definition, the size of the ABF market has grown to more than 50 percent of U.S. bird populations by some estimates. Further growth of this category appears inevitable.

Industry drivers

To understand the implications for these rapid developments, it’s critical to examine the drivers of the industry’s sharp growth trajectory. 

The birth of the specialty chicken category was originally centered on concerns for the welfare of animals. A small, select group of consumers cared about the conditions in which chickens were being raised, and were willing to pay the necessary premium for a differentiated product.  

However, the foundation of the “new and improved” ABF movement is a meaningful departure from its origins. Marketers are using the hypothetical and potentially negative interactions between consumed and ingested antibiotics to create an emotional reaction and spur a decision among consumers to move to ABF product. And for now, it’s working.

What do we know for certain about this evolution in the chicken industry?

It will raise the cost of production for U.S. processors, through increased mortality and a likely decline in weight gain efficiencies. This is an important side effect that will impact consumers in a way that is conveniently being overlooked in current marketing campaigns. 

These added costs, in some form, will eventually be passed along to consumers as all levels of the supply chain seek to protect or enhance margins.  At that point, consumer desire for a potentially safer alternative may be at least partly offset by the impact on their wallet. 

Beyond U.S. borders

The other side effect will likely be absorbed by processors themselves. The U.S. chicken industry exports nearly 20 percent of its annual production, predominantly to developing economies, where demand for protein is rising. In many ways, the export market for chicken has buoyed the U.S. industry through very difficult cycles, so it is an important distribution channel that cannot be ignored.

Those foreign consumers are extremely price sensitive, which is why cheaper-priced chicken has experienced such a large increase in global demand. They will not accept the premiums associated with ABF chicken, but there is little alternative for certain dark meat varieties that have relatively lower value in the U.S. market. These added costs will negatively impact margins or be passed along to U.S. consumers in the form of even higher prices.

The aforementioned evolution in the chicken industry is poised to have a significant impact on consumers of U.S.-produced chicken and processors. It is difficult to know who will absorb the expected cost increases of ABF chicken as processors may face lower margin opportunities from export distribution channels. For consumers, this inevitable growth in the ABF industry may be a classic example of the old adage, "Be careful what you wish for," because the outcome of these changes has yet to unfold.

 

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