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Poultry Meat and Products: Pessimistic Outlook for Exporters
A global environment shaken by economic turmoil in 1998 is having repercussions on all the major poultry meat exporters. The spread of the Asian contagion to Russia is resulting in exports taking a beating, with trade in 1998-for the first time in a decade-expected to drop. No reprieve is in sight for1999 and export opportunities are slim as the major markets continue to be characterized by constrained demand.
Overview
Market shocks around the globe have shaken poultry meat exporters who, since 1985, have benefitted from robust economic growth in emerging markets that triggered annual double-digit trade gains. An estimated 10 percent decline in imports by selected countries is now expected to reduce 1998 exports to 5.5 million tons.
The abrupt halt in Russian poultry meat imports has exporters scrambling to move product into different markets. Next year will likely be characterized by acute competition in many regions of the world. Overall exports by selected countries are expected to slide another one-percent in 1999 to 5.4 million tons and the decline in export earnings witnessed by the major exporters in 1998 is not expected to recover as prices remain low and competition strong.
While the United States continues to be the leading supplier to global markets, accounting for more than 50 percent of exports, U.S. poultry exports in 1998 and 1999 are expected to drop. However, the U.S.'s competitors are in Latin America and Europe are also under pressure. Only Thailand is surviving the market downturn, as a more favorable exchange rate allows them to market product more competitively.
The U.S. Industry Watches as 1998 Export Opportunities Wane
As poultry meat trade to Russia stops in its tracks, prospects for U.S. exports are eroding with 1998 estimate sliding to 2.5 million tons, 2 percent below 1997 shipments and the first decline since 1983. A heavy market dependence on Russia and prospects for only a limited resumption in trade to this market implies that this dim outlook will extend into 1999 with exports projected to continue their descent to 2.4 million tons.
This is particularly of concern since U.S. broiler meat exports, through August 1998, were booming, with total shipments up 16 percent over the previous year's level. While direct exports to Russia through this period were stable, more than half of the overall trade gains through this time period were generated by U.S. product moving into Latvia, Estonia, and Poland-all major transhipment points to Russia and the Ukraine. A virtual freeze on product moving into Russia from all ports, including the Baltics, has led to a downward revision in the estimate for 1999. U.S. broiler meat exports are now estimated at 2.1 million tons.
Unfortunately, there is no reprieve in the making from the world's other largest market-Hong Kong/China where demand is slack. The strong pace of product moving into Mexico, Japan, Caribbean and South American markets is not expected to compensate for declining Russian demand.
U.S. turkey exporters are not faring any better in 1998, with shipments through August 21 percent below the corresponding 1997 level. Unusually high demand from Russia through August (up nearly 30 percent) was not enough to offset the drop off in sales to Hong Kong/China-the U.S.'s second largest turkey market in 1997, after Mexico. U.S. 1998 turkey meat exports are now expected to drop to 191,000 tons, a 30 percent drop from 1997's record. Relatively robust demand from Mexico in 1999, and declining exports from our major competitor-the EU- support a 1999 forecast of 195,000 tons.
This overall gloomy export outlook is weighing on a U.S. poultry industry that entered 1998 with low feed costs and a robust export outlook. Ironically, factors exogenous to market conditions-disease issues and hot summer weather -have left the industry faced with a relatively tight supply situation. After a decade of experiencing annual average output gains of 5 percent, the U.S. broiler industry is looking at less than a 2 percent production gain in 1998. This has pushed up whole bird prices 20 percent over last year, while the 25 percent decline in feed costs through September maintained net margins at a relatively robust $0.22/pound.
While the broiler industry is hard hit by the Russian crisis, margins continue to be higher than average due to disease and weather factors that have limited production gains. U.S. broiler production in 1998 is estimated at 12.5 million tons, a less than 2- percent increase over 1997 and the slowest gain in 15 years. The effect of the halt in trade to Russia has led to a dramatic slide in U.S. leg quarter prices, from $0.36/pound in mid-August to $0.20/pound in mid-October). However, overall margins continue to be robust, supported by relatively strong white meat prices through mid-October.
These high profitability indicators are supporting a projected 5 percent increase in U.S. broiler output in 1999, to 1.3 million tons. Higher beef prices as the cattle cycle bottoms out, is expected to allow broiler meat to make inroads into overall per capita meat consumption projected at 122 kg in 1999. U.S. broiler meat consumption is expected to jump nearly 7 percent, pushing per capita levels to 41 kg.
The U.S. turkey industry, responding to stagnant U.S. demand and a dismal export outlook, is retrenching with output expected down for the first time in 17 years. As some operations go out of business and others convert to broiler production, 1998 output is now placed at 2.4 million tons, 4 percent below 1997. More favorable prices in 1999 are expected to prompt a marginal output increase.
The Brakes Are Put on European Exports
The strong growth in unsubsidized EU poultry meat exports is coming to a halt in 1998, dragging down the region's export estimate to 823,000 tons, 12 percent below the 1997 level. Previously led by strong growth in French exports of turkey meat and unsubsidized broiler part shipments by the Dutch, EU exports of 935,000 in 1997 more than doubled the WTO-sanctioned subsidized export commitments of 395,000 tons (including 20,000 tons rolled over from the previous year). Exports are expected to continue to slide in 1999 to 758,000 tons, the lowest level since 1994.
A drop in the 1998/99 export commitments for subsidized product to 345,000 tons (going down to 315,000 tons in 1999/2000), combined with a dismal outlook for trade to Russia, is weighing on the outlook for exports. Nearly 30 percent of 1997 European exports were reported by the EU Commission as destined for Russia. Both French and Dutch exporters, as did many other exporters throughout the world, found Russia a lucrative market for non-subsidized, lower-valued poultry meat parts, such as broiler wings, legs, and turkey parts.
While EU export restitutions for poultry meat cuts destined to Russia were available early in 1997, these were eliminated as the French industry moved to consolidate a larger and larger share of the declining export commitments. The annual subsidized quantity for poultry meat allowed the EU by the WTO is usually informally divided into export refunds going to whole birds and those going to poultry cuts. The ratio has always been more or less three-quarter going to whole birds exported primarily by France and Denmark and the one-quarter to parts exported by the Netherlands and Denmark.
In mid-1998, apparently, the share for whole broilers was reduced from around 314,000 to 300,000 tons while the remaining share for parts dropped from around 70,000 tons to 40,000 tons. This, as well the elimination of Russia as a allowable destination for subsidized part exports because products were moving without subsidy, implies that export refunds for part shipments will not be an effective tool to restart trade to Russia once the financial crisis in that market stabilizes. Subsidized whole bird exports to Russia could resume, however, as $140/ton restitutions are available for Russia.
Meanwhile France, which exports 40 percent of domestic output, counts heavily on Middle Eastern markets for whole bird exports. More than two-thirds of France's broiler exports, outside the EU, are destined to that region and in 1998 will be supported by restitutions of more than $300/ton. Russia, however, had becoming increasingly important as a market outlet, taking 35 percent of exports in 1997. The loss of the Russian market in 1998 for French product implies that the Middle East will become more and more of a battle ground for the two major suppliers to this slow-growing market-the French and the Brazilians.
Outlook for Brazil's Poultry Industry Mirrors Their Own Economic Slowdown
The outlook for Brazil's poultry industry mirrors the country's economic outlook with both poultry output and economic growth projected at only 1 percent for 1998. This weakness is expected to continue into 1999 with only a slight recovery forecast for the poultry industry, and no reprieve in sight for the domestic economy which is expected to enter a recession.
Price pressure from lower exports, weak domestic demand, coupled with limited availability of day-old chicks due to disease issues are estimated to constrain 1998 broiler production to 4.5 million tons, up only marginally from 1997. Broiler raisers reduced chick placements to 1.3 million chicks during the first semester of 1998. This was one percent lower than the same period of last year and is the second drop in chicken placements in the past 17 years.
While output is projected to increase slightly in 1999 to 4.6 million tons, industry analysts generally agree that the double digit poultry production growth experienced by the Brazilian industry since the mid-1980's has leveled off. Production in the coming years will continue to grow as a result of previous investments in the sector which are contributing to productively gains, but the pace of such improvements and growth will slow. This is despite the recent investment in the industry by the French poultry company Doux which, in July 1998, announced its purchase of Frangosul, Brazil's fourth largest processor of poultry meat and pork.
Declining exports to Japan, combined with increasing competition with the Europeans in the Middle East, and the shock of the Russian financial crisis, are taking a toll on the Brazilian poultry industry. Broiler meat exports are now estimated down 12 percent in 1998 to 570,000 tons. Recent export data through July 1998 reveal that the volume of exports to-date is down 11 percent, while value has plummeted 22 percent. Regionally, Brazilian exporters to Argentina are facing problems with the new Argentine regulations for residue control and food hygiene, causing detention of several poultry meat and pork shipments.
The domestic market is offering slight support to the industry with consumption expected to increase by nearly 3 percent in 1998 and 1999. Competitive broiler prices relative to beef prices, strong demand from the institutional markets and, most important, increased consumption of prepared chicken products are fueling this increase in consumption. Large Brazilian poultry processors are responding to changing consumer eating preferences by shifting sales mix strategies towards parts as opposed to whole birds, with a particular emphasis on further processed value-added branded products, such as frozen chicken meals, pre-cooked meats, chicken nuggets, and chicken burgers.
While the consensus is for slower growth in Brazil, their industry is expected to continue to expand, demonstrated by their ability to increase concentration and reduce the number of small- and medium-sized processors who face higher interest rates and compressed profit margins. Brazil continues to be the lowest cost producer of poultry meat in the world as evidenced by the live weight average cost of production in Sao Paulo state, estimated for the first semester of 1998 at $ 0.63/kg . Costs are even lower in the South because of the more integrated nature of the industry.
Economic Turmoil in Thailand Limits Production Gains But Supports Exports
Growing unemployment in Thailand and an economic recession that has reduced real income has put the brakes on the growth in poultry meat demand. A 7-percent estimated decline in domestic consumption is limiting production gains to only 1 percent, or 910,000 tons in 1998.
While the industry is enjoying improved exported prices in 1998, the average cost of production has climbed significantly from about 23-25 baht/kg (live weight) in mid-1997 to about 30-31 baht/kg ($0.81/kg) in 1998. The mid-1998 cost of production (31-32 baht/kg) is roughly the sum of costs for: a one-day old chick (6.5 baht), feed (20-21 baht), vaccinations (1.5 baht), labor (1.5 baht), and other costs (2 baht). Reflecting higher costs of production, wholesale prices for live broilers have increased more than 21 percent thus far in 1998, constraining customer buying and affording only limited profitability for producers, despite higher prices.
The rippling effects of the devaluation of the baht in 1997 are still evidenced in 1998 with exports estimated to reach 240,000 tons, 25 percent over the 1997 level. Shipments to Japan and the EU, Thailand's major markets, have soared in response to favorable prices, as well as the continued ban on imports of Chinese broiler meat by the European Union and recent regulation by the Japanese government to declare the origin of imports.
Supported by larger exports of further processed products to Japan and skinless boneless breast meat to the EU in the first half of 1998, exports increased 47 percent to 127,449 tons. In this same period, Japan accounted for 72 percent of uncooked meat exported from Thailand and 60 percent of further processed meat. Meanwhile, the EU accounted for 25 percent of uncooked meat, and 40 percent of further process meat shipments, respectively.
Trade sources believe that total shipments in 1999 should continue to expand, but at a slower pace, due to a lack of liquidity among integrated operations and the uncertainty over China's currency policies. Domestic consumption should come back slightly in 1999 in line with an anticipated recovery in the Thai economy.
A Longer Term Prognosis
The double-digit consumption and trade gains for poultry meat witnessed over the early 1990's are likely at an end. However, the gloomy outlook for 1998 and 1999 are likely to be temporary with trends in consumer behavior and the lower relative prices of poultry meat compared to other protein sources prompting a continued expansion in demand for these products over the next decade.
Economic and population growth, combined with a growing demand for convenience food will likely support annual world growth for poultry meat at the 3-4 percent level over the next decade. The poultry industry's demonstrated ability to respond to consumer demand by expanding product lines with high value added products will allow exporters in the United States, Brazil, and China to continue to compete effectively with exporters of both pork and beef.
For further information, contact Nancy Morgan (202) 720-1372.
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