Poultry business, 2017
In a WATT PoultryUSA interview, economist Paul Aho makes 10-year predictions about the poultry industry – its firms, markets and the competition ahead.
WATT PoultryUSA : Please describe the poultry company of 2017 and how it will be different from today.
Dr. Paul Aho : I think there will be two kinds of poultry companies in the future. There will be a few very large companies of the type we see developing today and also a number of smaller players that may be very different from today’s poultry companies.
There will be three or four national companies that market coast to coast with a product line in every market. Those companies will take 60 percent to 70 percent of the market.
There may also be a couple dozen niche players with 30 percent to 40 percent of the market. Those companies could be quite different from the poultry companies we’ve seen up till now. Some of them may not be completely vertically integrated; some of them will be selling very specific products only to very specific markets. Some of the most unusual changes will be coming about in those surviving niche players.
The traditional, vertically-integrated, full-product-line companies with only one plant may be on the way out. Replacing them will be companies of the same size but with niche products.
WATT PoultryUSA : Where will poultry companies be located in the future?
Aho: Today’s geographic distribution of poultry companies and plants will continue with most of the industry located in a belt that goes from Texas to Delaware and with some plants on the West Coast and a few in the Midwest. The Southeast and South Central United States will continue to have an advantage in production costs over the rest of the country.
If we do see any movement of plant locations, some processing facilities may be located a little bit closer to the Corn Belt but not in the Corn Belt. More production of hatching eggs might move into the Corn Belt with hatching eggs being sent south to other companies. So, while I don’t think Iowa is going to become the place where chickens are produced, the industry may get a few miles closer to Iowa than is now the case.
Also there may eventually be some offshoring, where companies move part of their production to other countries. I wouldn’t expect to see a big movement that way, but some production may move overseas in the next ten or twenty years. The United States will continue to be a major exporter of chicken meat, but there may be some imports of chicken meat into the USA in the future. I would expect the United States to continue being a net exporter of chicken meat, but importing and exporting meat simultaneously.
WATT PoultryUSA: How will companies be owned, financed and structured in the future?
Aho: I think there probably will be fewer private firms. Up till now, industry firms have been primarily family, privately-owned companies. Not all, but some of those may change from private to public ownership. So, there’ll be a trend in the direction of more public ownership and less family ownership.
WATT PoultryUSA: Will companies be vertically integrated, or will they rely more on alliances and/or ‘virtual’ integration?
Aho: The large companies will be substantially the same as today, vertically integrated, but some niche players will be engaged in strategic alliances, both upward and downward. Even the big companies may experiment with some vertical integration that goes beyond what we’ve seen up till now. For example, Gold Kist, now a part of Pilgrim’s Pride, purchased part ownership in some grain elevators. There may be more experimentation in the direction of sourcing grain. I don’t know if this is going to work, but it is an interesting experiment. And there’s always been experimentation in the other direction, integration toward or strategic alliances with restaurants. It hasn’t worked in the past, but I expect to see a continuation of experimentation in that direction as well. There will be continued experimentation with strategic alliances, long-term contracts and cost-plus arrangements. The industry is always searching for the best way to spread the risk around – risk of higher grain prices and lower meat prices.
WATT PoultryUSA: How will consolidation proceed in the production of food proteins? How many companies will be involved and of what size and nature?
Aho: I think you put the right word on it. There’ll be more food companies as opposed to just chicken companies. There may be chicken companies, but there’ll be more food companies as well. So, there may be consolidation – not just within the poultry industry, but also within the food and protein industries. That’s a long-term trend that will continue. So I wouldn’t be surprised if companies get larger and also start producing other proteins, as does Tyson now.
WATT PoultryUSA: What will be the role of international companies?
Aho: I think the largest U.S. companies will become international companies. Probably, the largest companies in the USA will eventually be major players in Brazil, China and Western Europe, at a minimum. The model here would be the automobile manufacturers who have production facilities in many countries around the world. I think we’ll see that happening to chicken companies. I wouldn’t be surprised if some chicken companies from other countries become established in the United States. There’ll be a dozen or so international firms from Asia, Europe and the United States with plants around the globe.
WATT PoultryUSA: How will alliances between suppliers and poultry producers develop and change? By suppliers, I mean pharmaceutical companies, breeder companies and processing equipment companies.
Aho : I would expect suppliers to remain independent. Of course, there has been a consolidation of suppliers in the past, and that consolidation will continue in the future. So, we’ll see fewer suppliers in every product category. Poultry production companies are going to focus on what they do the best, producing poultry.
At the same time, companies will take a look at every function and every department and decide what should be done by someone else through outsourcing. There may be some functions or departments that can be done in other parts of the United States or overseas. Outsourcing and insourcing will be important in the future.
WATT PoultryUSA: How will regulation shape the protein production business in the future? Will it change the location and cost of production?
Aho: Regulation is increasing not only in the USA but also in Europe and other parts of the world. If regulation goes overboard, that can cause an industry to leave a country. I don’t think that’s going to happen in the USA, but it may affect where companies are located within the United States. If the burden of regulation becomes too great in certain parts of the United States, the industry may move to other parts of the country. There may be some movement of facilities within the country due to regulation and also due to population pressures in some areas.
WATT PoultryUSA: Will the relative cost of food proteins increase, decrease or remain stable?
Aho: After a long period of decreasing cost of food, it looks like we’re now in a period of increasing cost of food proteins. And a big part of that is due to the increasing value of energy in general, and specifically, the energy found in corn that’s being converted into ethanol. So for the first time in several decades, the cost of producing chicken is moving upward instead of downward. That’s a worrying factor for the industry at the moment.
WATT PoultryUSA: Will increasing production costs impact poultry protein differently than other proteins or food products?
Aho: Actually, poultry protein will be in a little better position than other food proteins, because of the favorable feed conversion of the chicken. The poultry industry will be hurt a little bit less than the hog industry and the beef industry. Although the cost of producing poultry will be going up, prices will be rising for all proteins. The chicken industry should do fine.
WATT PoultryUSA: There’s competition around the world for land, water resources, labor, grain and other inputs. How will this impact the poultry industry?
Aho : You have brought up a subject that people don’t talk about very often – that’s water. The availability of water will begin to affect where food production takes place. And in that respect, the USA is blessed with a good supply of water, which will help competitively. There are places around the world where water is becoming scarce, particularly good quality water, and it may reduce the competitiveness of some countries in poultry production.
The USA is going to always be in a good position as far as grain costs go, although the recent ethanol craze has increased the costs of grain. But this has increased the cost of grain for everyone around the world, so the USA is still relatively in the same position, although its costs are higher.
Labor is probably the weakest aspect in the USA’s competitive position. But because grain is so much more important than labor, the USA has been able to remain competitive despite its labor disadvantage.
The most competitive areas in the world, other than the USA, are places where there is a combination of low labor and low grain prices, which are found in very few parts of the world. A notable exception is Brazil, where they find the combination of low grain prices and low labor costs in the same country.
WATT PoultryUSA: Today, the world’s leading poultry producing countries are the USA, Brazil and China. Which countries will lead the world in production in 2017?
Aho: There has been a rapid increase in production in China, though that has recently slowed a bit. China won’t be the leading poultry producing country in 2017, not because the Chinese couldn’t do it but because they prefer pork over poultry. Brazil’s production has been increasing very rapidly, but not so fast as to overcome the United States within ten years. It may take them twenty or thirty years to surpass U.S. production. So, I think the USA will still be the largest producer in 2017, but Brazil will be nipping at our heels and China will be slightly behind Brazil. The ranking in poultry production will be the USA, Brazil and China, instead of the USA, China and Brazil, as it is now.
WATT PoultryUSA: How will those same countries stand in exports in 2017?
Aho: Brazil is the leading country exporter right now; the USA is second largest exporter. Ten years from now, it will be the same. Brazil will be the leading exporter; the USA will still be second largest exporter. China is a relatively unimportant exporter. China imports and exports chicken in quantities that are not very significant compared to Brazil and the USA.