More investment is needed to safeguard the future of British chicken production and to ensure a continued supply of locally-produced, fresh poultry meat, according to a report commissioned by the National Farmers Union (NFU) and broiler growers.
The report shows that periods of sustained loss from 2004-2008 have led to little investment in the broiler industry, particularly in new housing. Additionally, input costs have risen dramatically over the last five years, while margins have failed to increase to the same degree.
Commenting on the report’s findings, NFU poultry board chairman Charles Bourns said: “Despite having a will to reinvest in this sector, British chicken producers are lacking the means. Costs for investing in new poultry sites, for example, have more than doubled in the past 10 years, but this is what we need to do to ensure a vibrant sector in the future.”
The study found that returns on investment for poultry growers gave little or no incentive to reinvest and that the cost of investing in new poultry sites had doubled over the last decade.
The authors suggest that an acceptable internal rate of return for growers would be 15 percent, but found that this was not achievable. They note that growers’ margins are now showing some improvement, following a period of decline and later stability, but that all costs over the period increased.
In particular, energy and water unit costs for Britain’s poultry growers have double over the last decade and, according to the NFU, this has translated into a 35 percent increase on a p/kg basis.
After decades of expansion, UK broiler production has, more recently, fallen in response to poor grower returns, with investments in new housing significantly lower. This has hampered productivity growth, as the industry is relying on an ageing production base.
The report argues that investment in broiler sheds is relatively high risk. Based on the authors’ model, there is currently no return for risk for entrepreneurial investment and, consequently, a commercially-minded producer is unlikely to invest. To induce investment in new and energy efficient refurbishment of existing sheds there would need to be a significant improvement in grower margins, the authors argue.
Growers have had to rely on efficiency gains to support their margins, as the price that they receive has declined in real terms. Most gains have been made through the genetic improvement of birds, and further efficiency gains are expected to be increasingly difficult.
Yet, irrespective of these efficiency gains, the actual live weight buying price for British poultry farmers has fallen behind inflation adjusted since 1997.
A fundamental problem faced by the sector is the high margin expectations of retailers, the report argues, and this disproportionate margin expectation in the chain leaves significantly less margin to share between the integrator and the grower.
The broiler chicken market saw value growth of 5 percent in 2008 compared with 2007, but volume sales fell by 2 percent, indicating rising prices at retail level.
The pricing mechanisms currently in operation in Britain allow live weight price rises to be obtained for feed and chick price rises, but this is not generally the case for the increase in cost of other farm inputs, such as energy and new costs incurred as a result of new legislative measures for production.
There are, however, examples of good practice in integrator/grower arrangements, including feed and energy ratchets.
The report goes on to argue that if there were to be any reduction in the price paid to growers it would put the industry under strain, possibly leading to an exodus. The authors point to the UK pig and dairy sectors, arguing that they offer some important lessons for the broiler sector.
Both the pig and the poultry industries in Britain have contracted as a result of sustained periods when costs exceeded income, and with serious import competition, leading to little or no confidence for farmers to reinvest.
A better future
Against this backdrop, the report’s authors make a number of suggestions as to how the current situation might be improved.
Growers, processors and retailers need to work more closely together, they argue, in order to achieve benefits for all parts of the chain. In order to reduce costs within the supply chain, all parties need to operate at as close to full capacity as possible. An appropriate pricing mechanism that rewards, or penalizes, the party with control over a given resource is also needed.
Reinvestment in broiler sheds, which would benefit the whole supply chain, requires confidence in long-term relationships with retailers. Contract periods tend to be too short - as little as two crops - to justify capital investment requiring a payback of at least 10 years.
The weak level of sterling has made imports relatively more expensive. The authors argue that a vibrant UK broiler industry is desirable if for no other reason than price risk management and security of supply for retailers in the short and long term.