Difficult times persist for global poultry producers, but long-term outlook positive

The first few months of 2013 are expected to offer little cheer for the poultry industry, but as the year progresses, the situation should improve. Long-term, the future looks bright, but producers are continuing to struggle with high input costs, weak demand, and slim or even negative margins.

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The first few months of 2013 are expected to offer little cheer for the poultry industry, but as the year progresses, the situation should improve. Long-term, the future looks bright, but producers are continuing to struggle with high input costs, weak demand, and slim or even negative margins. 

Feed prices continue to be central to the industry’s problems, and producers have had difficulties in passing them on. Droughts in the U.S., South America and Russia have all negatively impacted production. In a report published late last year, Rabobank forecasts that food prices as a whole may reach an all-time high in the first quarter of this year and continue to rise through to the third quarter. Moreover, across all foodstuffs, it is the inputs for animal feed where the greatest inflation is occurring.

It estimates that world corn (soybean) stocks have fallen to 51 days of use. Falling stock levels will continue to push up prices for animal feed and consequently the cost of meat and dairy products. Much will depend on the quality of 2013’s harvests. While there can be no guarantee, they are unlikely to be worse than those of last year. 

The one advantage poultry producers have when feed prices are high is that when compared with producers of other animal proteins, the poultry industry at least can adjust more quickly due to short animal life cycles. However, this is small comfort for those hit by rising input costs. Producers in the EU, the U.S., Thailand, India and South Africa are thought to currently be experiencing particular difficulty. 

Economic outlook

The global economy remains weak. The European economy is stagnant, but other regions of the world where economies have held up are seeing their economic performance slow. While still growing, Brazil, Russia, India and China are no longer recording the growth rates or enjoying the export success that they once did. The home market has become more difficult for Brazilian poultry meat producers, while demand is also down from key importing markets such as Hong Kong, Saudi Arabia and Japan, and this is feeding through to their suppliers, such as Brazil and the EU.

According to Nan-Dirk Mulder of Rabobank, the first quarter of 2013 is likely to be challenging as higher feed input costs move through flocks. Beyond that, he argues that returns will depend on industry discipline in keeping production sufficiently moderated to raise prices and offset increasing costs. Weak global demand, he says, is urging industry players to rationalize their supply base, and non-strategic vehicles are being divested. 

Cut backs and expansion

The U.S. has already started making supply cuts, and prices have been rising at retail level there. Additionally, the U.S. is witnessing growing demand for dark meat and for leg exports. Yet, if one looks to Thailand, rapid industry expansion and the loss of export markets have resulted in significant oversupply on the home market. While Thailand may now be re-entering export markets, other players filled the gap left by the country. Brazil’s producers are facing difficulties on the home market, and less efficient plants are being made idle or sold as the local population is less able to afford poultry meat.

There are, nevertheless, ongoing expansion projects around the world, for example in Saudi Arabia, Russia and of course in China. But developing markets are those where consumers are most sensitive to price increases, and the Middle East, Asia and North Africa are those regions of the world most sensitive to any increases in food price inflation. In a global economy, the impact of higher input prices in one region can quickly have an effect in other regions.

Positive longer view trend

So while the long-term trend in meat consumption is still expected to be positive, current difficulties could result in that upward curve becoming flatter. And it should not be forgotten that when starting from a larger base, high volume increases do not always translate into high percentage increases.

This slowing in growth has been examined by Paul Aho, of consultancy Poultry Perspective, who notes that future growth rates in chicken meat and egg production will be much lower than those of the last two decades.

He points out that meat and egg consumption stood at some 40 kg in 2002, and this is expected to only increase to 46 kg over the next decade. But the comparison bears a little more examination. While the increase per capita may seem disappointing at first glance, it should be remembered that the population will have increased to 8 billion, from 6 billion in 2002. Not only are people consuming more meat, but more people are consuming it.

Encouragingly, he believes that, over the next five years, feed costs will drop from today’s highs, although they will rise again by 2022. Yet, when viewed in the context of all meat production, the poultry production will be less disadvantaged than other sectors, as the difference in feed efficiency between poultry and other meat production over the period is expected to widen. 

He also predicts that of all meat types, chicken meat will see the highest growth rates. This will particularly be the case in Asia and Latin America, but producers in Africa are also expected to fare well. 

In comparison to developed markets, most of Asia still enjoys low cost labor and capital, and access to large markets. The local industry will continue to make efficiency gains, and value is given to every part of the chicken.

Although slowing somewhat, Latin America is enjoying strong economic growth along with political stability. The next 10 years could be viewed as “The Latin American Decade.” Chicken meat output in the region is expected to grow by 8 percent to reach 30 million tons, seeing the region’s share of world production expand from 27 percent to 32 percent.

Success is also forecast for Africa, which should see its share of global production grow from 5 percent to 8 percent. 

The first half of 2013 is expected to see little positive change for the sector globally, but the situation is unlikely to deteriorate significantly. Restricting supply may be the only way in the short term to increase profitability, however, in the longer term, demand is still expected to increase, albeit at lower levels than the sector may have become accustomed to.

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