LIVESTOCK AND POULTRY
World Markets and Trade
March 1998

Economic Upheaval in Asian Poultry Markets

Economic uncertainty characterizes the markets of Asia where currency devaluations, slow economic growth, and financial adjustments since mid-1997 have lowered consumer purchasing power and set the stage for structural changes in the region's poultry meat sectors. Market opportunities for U.S. product in many of these markets are constrained by the high value of the U.S. dollar and increased competition from other Asian countries, especially Thailand.

Trends in meat consumption, in general, can serve as an indicator of the stage of development of a country and an industry. This is particularly true for Indonesia, Malaysia, and Thailand, three countries that have been hard hit by the effect of the Asian economic crisis. The impact on their respective poultry meat industries has varied depending on the individual country's level of per capita income and structure of its industry. In each country, the long term effect of the crisis will be a stronger, more integrated poultry industry.

Despite the current economic turmoil in S.E. Asia and slowing demand from Japan and China, the region's long term growth potential for poultry meat imports, especially in emerging markets such as Indonesia, promises great returns for the U.S. industry. In 1997, however, Asia only absorbed only 27 percent of U.S. broiler meat exports, with 22 percent destined for Hong Kong/China ports. Japan accounted for only four percent of U.S. exports while S.E. Asia logged in a paltry one percent.

Indonesia's Poultry Industry: Running on Empty

Economic turmoil has wreaked havoc on the Indonesian poultry industry, an industry which supplies most of the animal protein requirements for Indonesia's population of more than 200 million. Prior to the economic crisis, Indonesian poultry output--70 percent of which is produced by small farmers-- experienced growth rates of nearly 15 percent per annum. However, per capita poultry meat consumption remained among the lowest in Asia--5 kg/year.

Since the crisis, however, a breeding industry that produced nearly 14-15 million day old chicks per week (constituting 900,000 tons of broiler meat per year) has been operating at only 30 percent capacity. Nearly all small producers have liquidated their stock and only a few of the four major integrators: Charoen Pokphand, Japfa Comfeed, Subur, and Anwar Sierad have breeding stock.

Feed costs have nearly doubled since the devaluation in 1997. In February, the overall cost of production consistently exceeded selling prices for live birds. With a high dependence on imported feed ingredients and significantly weaker consumer purchasing power, overall demand for chicken meat and feed ingredients is likely to be down 40-50 percent in 1998, pushing poultry meat production down from the 980,000 tons reported in 1997.

In this difficult economic environment, it is inevitable that the longer term outlook will be for increased consolidation of the industry, particularly among small-to mid-size breeding farms and processors. In the short term, however, all the integrators are experiencing extremely tight capital flows and, even if working capital is obtained, it would take three months for the industry to jump start itself. Cultural dietary preferences for poultry meat, combined with a large population base and future potential for income growth indicate that Indonesia will be one of the largest future markets for poultry meat--supplied from both domestic production and imports

Malaysia: Less of a Crisis

The situation facing the Malaysian poultry industry is less serious than in Indonesia. While small producers have suffered from the more than 30 percent increase in feed costs, the financial status of the seven integrators seems to be sound. Poultry meat comprises nearly 70 percent of total meat consumption and as low-priced protein source may not decline as severely as in Indonesia. Consumption is estimated to drop in 1998 but more from consumers' responding to government encouragement to increase savings and reduce conspicuous consumption than from any income induced declines.

Per capita broiler consumption in Malaysia, at 32 kg, continues to be the highest in Asia. Per capita incomes of nearly $4,500 may imply that the income elasticity for poultry meat may be relatively inelastic, especially since poultry meat supplies a majority of the protein requirements for the Muslim population (50 percent of the population).

Imports into Malaysia are impeded by a non-transparent system of import licensing, similar to that in Indonesia. In the past the quota has been allocated to an agricultural producers association. However, the government has indicated that it would like to have the quota transferred to users interested in further processing. Also constraining imports is a pricing policy enacted by the government that sets the margins for all the players in the poultry market chain. The Federation of Livestock Farmer's Association, an organization representing small farmers, has been instrumental in increasing farm gate prices in recent months by demonstrating that higher feed costs have resulted in producers losing money.

However, the overall effect of maintaining fixed margins limits the ability of imported product to compete in the market. The objective of controlled prices is to reassure consumers that, in the context of rising prices, the producers are not exploiting the consumers. The industry has expressed its opposition to the system of price controls adopted in 1996.

In 1998 broiler production in Malaysia is likely to drop below the 610,000 tons reported in 1997. Consequently, demand for feed grains and soybean meal, much of which is imported, is likely to ease slightly from the previous year. In the longer term, the poultry industry in Malaysia is expected to continue to grow, with the economic crisis forcing many of the small growers, which produce nearly 70 percent of total output, out of the business. This shift in production patterns favors the historical trend towards increased integration of the industry.

1/ Assumes 50 percent drop in production.
Source: FAO data.

Source: Dept of Veterinary Services
1/ Assumes a 20 percent drop in production.

Thailand: Exports Benefit from Currency Devaluation

Benefitting from its export orientation, Thailand's poultry industry appears relatively unaffected by the economic crisis that has plunged the baht into a 70 percent nosedive since mid-1997. Strong import demand for Thai product, particularly by Japan and the EU, have allowed the industry to weather the nearly 30 percent increase in feed costs. Also contributing to the industry's relative stability is the structure of the industry. Seasoned and well established integrators, led by Chareon Pokhand, dominate poultry output, accounting for more than 70 percent of total production. This differs significantly from Indonesia and Malaysia where integrators are relatively new entrants to the industry, with newly created financial structures, particularly in Indonesia, that are hard pressed to survive an economic crisis which forces the industry to rely exclusively on cash flow for survival.

Despite the economic turmoil in Thailand, strong international demand for Thai product is expected to push up broiler production, forecast up 7 percent in 1998. Any decline in production by small producers who sell whole birds to domestic consumers is expected to be more than offset by strong output by many of the export oriented integrators. These production gains come despite significant increases in cost of production. The average cost of raising broilers climbed significantly in 1997 as a result of rising costs of imported feedstuffs, which rose from about 23-25 baht/kg ($.45/pound) in mid-1997 to 30 baht/kg. While imported corn constitutes only 10 percent of domestic feed consumption, imported soybeans and meal account for over 80 percent of the industry's protein requirements. Chick prices remained around 8-10 baht/bird but have recently dropped to 6 baht due to constrained demand by smaller producers.

Low pork prices and slow economic growth slowed gains in domestic poultry meat consumption to 6 percent in 1997, considerably less than the double-digit gains over the past few years. The economic crisis brought about a switch favoring the consumption of lower-priced chicken offals which will continue into 1998, freeing up more meat products for export. Exports in 1997 are reportedly 18 percent above 1996 and this double-digit growth is expected to continue into 1998, with exports reaching 227,000 tons, accounting for nearly 20 percent of total production

Earlier in 1997, Thai chicken exports were buoyed by a 7 percent increase from the previous year's level as strong EU demand (40 percent of sales) compensated for declining demand from Japan. However, the devaluation in July led to surging exports to Japan which reportedly switched their orders from China to Thailand in the last quarter of 1997 as prices for Thai uncooked broiler meat became competitive with Chinese products. Meanwhile, sales of uncooked meat to the EU also increased in 1997, following the EU's continued import ban on Chinese broiler meat.

This export movement is supported by very competitive prices. Boneless leg meat prices to Japan dropped from US$1,800-2,000/ton in the first half of 1997 to $1,700-1,800. These prices are expected to decline further in 1998, ranging perhaps between $1,500-$1,700/ton. Prices for skinless boneless breast meat, shipped to the EU, dropped from $2,700-2,800/ton in early 1997 to $2,300-$2,400 and quotes for the first quarter of 1998 range between $2,100-$2,200.

Shipments of cooked broiler meat from Thailand continue on a steep upward trend, increasing 45 percent in 1997, from 28,369 tons to 41,114 tons. Japan and the EU are the major markets, accounting for 79 and 20 percent of sales, respectively. Exports of cooked broiler meat are forecast to reach 50-60,000 tons in 1998. These products are shipped in 3 forms: deep-fried, steamed, and roasted. In addition, they are usually seasoned with other ingredients before cooking, such as marinade, batter and breading, spice or sauce mixes. In general, the prices for these products are in the range of $3,700-$4,500/ton.

Japan: Acute Competition for a Slowing Market

Increased beef and fish intake by Japanese consumers during the second half of 1997 led to reduced poultry meat consumption. This resulted in significant oversupplies of poultry meat in mid-1997, leading to sharply lower wholesale prices, down 8 percent for fresh/chilled boneless leg ($2.07/pound) and 6 percent for boneless breasts ($1.06/pound). In the third quarter of 1997, prices continued to decline, moving down 20 and 18 percent respectively from last year's level.

The oversupply situation in Japan and the weakened yen in 1997 led to an unprecedented 10 percent drop in poultry meat imports to 490,000 tons. Meanwhile the market demand shift in Japan continues to favor more ready-made and ready-to-cook products exported by countries such as China, Thailand, and Brazil. U.S. exports in 1997 were down 20 percent from the previous year as increased fresh domestic and Chinese boneless leg meat supplies in the retail market dampened imports of larger quantities of U.S. bone-in-leg meat for further deboning. In the diversified and processed product-oriented Japanese chicken market, bone-in-leg meat from the United States is decreasing in significance in the market.

In 1998, Japanese poultry meat consumption is expected to continue to slip below the previous year's level with imports expected to stay level at 490,000 tons. The United States is expected to continue to lose market share in the fierce battle for this high priced market as competitively priced, further processed Thai products make inroads into the market.

Disease Crisis in Hong Kong Abates, Trade Still Slow

Poultry meat consumption in Hong Kong is expected to drop slightly in 1998 due to the "Bird flu" virus concerns in late-1997 that led to the slaughter of the area's 1.5 million chickens. As a result of the influenza scare, the government banned imports of live birds from China from late December 1997 through February 7, 1998 and adopted more stringent sanitary requirements for licensing of chicken farms.

The Hong Kong government is planning to implement three measures to safeguard wholesomeness of imported and domestic live chickens. First, quarantine regulations and procedures will be improved while tightening licensing of local chicken farms by imposing stringent hygiene requirements. Finally, cross contamination between chickens, ducks, and geese will be avoided by the establishment of a centralized slaughterhouse for ducks and geese. In addition, imported live birds must be accompanied by a health certificate stating that they are H5 avian influenza free.

The immediate effect of the flu scare was devastating for poultry consumption which rebounded somewhat in January but only to around 40 percent of pre-avian flu crisis levels. Trade virtually stopped in late December, aggravating the already slow pace of trade to the Hong Kong/China market in 1997. Total poultry meat imports by Hong Kong, 856,000 tons, were up only 7 percent in 1997, compared to 16 percent in 1996. Constrained demand in China for imported product resulted in Hong Kong traders accumulating large inventories and incurring big losses due to storage costs ($840 per container/month). Since October 1997, poultry meat prices in China dropped about 30 percent due to the oversupply situation.

Total imports by Hong Kong reached nearly $900 million in 1997 with the top three import categories being frozen chicken feet, chicken wings, and frozen chicken cuts. Exports to China in 1997 and 1998 were revised downward to 569,000 and 576,000 tons, respectively. The United States occupied a 65 percent import market share in 1997. Brazil, the second largest supplier represented an import share of 8 percent. U.S. exports are characterized by a wide variety of poultry products and grades, satisfying more end-user needs. While the United States remains the most competitive supplier of poultry products to Hong Kong, Brazil's frozen whole chickens are noticeably improving in quality and are cheaper than U.S. product.

Hong Kong is becoming a growing market for turkey meat, fueled by surging demand in China. The United States is the largest supplier of turkey meat to Hong Kong, mainly turkey offal and whole frozen turkey. Brazil also exports turkey to this market, supplying turkey cuts and offal with a small volume of whole frozen turkeys.

Chinese Exports Pressured by Thailand

Suffering from an oversupply situation in 1997 (see poultry meat and product's section), producers in China lost money in 1997 as exports slowed. Many Chinese wholesalers still have large inventories of frozen chicken products. Steady price declines since March 1997 have been recently aggravated by lower prices in international markets where Chinese product competes with competitively priced Thai chicken parts.

Strong competition from Thailand in the very price sensitive Japanese market is projected to lower overall broiler exports from China to 410,000 tons, down from 1997's exports of 415,000 tons. In addition, the implementation of a quota system for exports of frozen poultry on January 1, 1998, will limit the ability of many of the 200 Chinese companies engaged in the frozen poultry export business to ship product. The new policy was enacted to restrict the quantity and maintain high prices for Chinese poultry exported to Japan. Price pressure in the Japanese market has dropped overall export revenue with deboned leg prices dropping approximately $100/ton. At present, Shanghai Dajiang Group is the largest Chinese exporter of chicken meat, reportedly exporting more than 40,000 tons of chilled and frozen chicken meat in 1997 (one fifth of total exports to Japan). According to traders, the export quota system, as well as the ban on chicken meat imports from China by some countries, such as South Africa, UAE, and South Korea, is likely to reduce China's exports, leaving more product on the local market.

Asia Still the Market of the Future

Despite all the uncertainties that characterize the economic outlook for Asia in 1998, the long term economic fundamentals underpinning the outlook for the region are sound. Continuing potential for income growth in many of the Asian countries, a region which holds a large share of the world's population with low per capita poultry meat consumption, are significant determinants of global poultry meat trade in the next decade.

The next WTO round sets the stage for a continued reduction in many of the tariff and sanitary/technical barriers to trade. Poultry meat is undoubtedly ready to reap the advantages of both continued growth in demand and reduced barriers to trade.

Last modified: Thursday, April 06, 2000