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Poultry Meat and Products
Plentiful poultry meat supplies and lackluster global demand is expected to lead to intense competition between exporters in 1999. The uncertain economic situation in Russia-previously the world's largest importer-is likely to reduce trading opportunities in 1999 while the changing competitive position of major poultry meat exporters due to currency devaluations adds to the uncertain outlook.
Overview
Despite forecasts of economic growth outside the United States in 1999 of less than 1 percent and record global pork supplies, poultry meat consumption by selected countries in 1999 is expected to grow to 52.9 million tons. This projected growth of 3 percent, considerably below the 6-percent gains in consumption witnessed since the early-1990's, is occurring in a context of continued economic uncertainty in Asia, compounded by the financial crisis in Russia-until 1997-the world's largest poultry meat importer.
Favorable returns for producers in selected countries of the world due to ample soybean and corn supplies and low feed prices are prompting a 4-percent production increase in 1999. Led by gains in the United States, poultry meat output by selected countries is expected to reach 55.2 million tons.
After experiencing double-digit export gains over the past decade, poultry meat exports in 1998 registered an unprecedented decline as the financial crisis in Russia put the brakes on the growth in world poultry meat trade in mid-year. The pervasiveness of the economic crisis in Russia is expected to generate a 5-percent decline in overall poultry meat imports by selected countries in 1999 to 4.3 million tons.
While continuing to be the world's major poultry meat supplier, U.S. exports are expected to drop 5 percent to 2.4 million tons in 1999 as the growth in global demand languishes. Despite expectations that U.S. leg quarter prices will remain low in 1999, strong competition is expected from Brazil due to its January 1999 currency devaluation. Brazil is the only major poultry meat exporter forecast to increase shipments in 1999.
As Goes Russia, So Goes the Global Poultry Trade Outlook...
Nearly 60 percent of the double-digit growth in world poultry meat trade in the 1990's has been generated by Russia. A decade of market reforms and structural adjustments in the Russian livestock and poultry meat industries resulted in a more than 60-percent drop in domestic meat production. This output decline generated strong demand for imported product, particularly low-priced broiler meat and pushed Russia by 1997 into position as one of the largest meat importers in the world-second only to Japan.
The world poultry meat market was shaken in August 1998 when the financial crisis in Russia resulted in the ruble devaluation and a virtual halt in poultry meat imports. Russian traders immediately encountered problems obtaining trade financing and Russian poultry meat imports in 1998 dropped 31 percent to 891,000 tons. This year-to-year drop of nearly 400,000 tons accounted for more than 10 percent of total global imports in 1998.
The pervasiveness of the Russian financial crisis and the continual erosion of Russian consumer purchasing power are expected to fuel a further double-digit drop in poultry meat consumption and imports in 1999. This follows on the heels of a 20-percent drop in Russian consumption in 1998 as retail prices for leg quarters, and other meats, more than doubled in urban areas due to the effect of the ruble devaluation.
Higher prices and average Russian monthly incomes that have dropped from $160 in July 1998 to $50 by December 1998 will limit overall poultry meat consumption in 1999 to 1.3 million tons. Per capita poultry meat consumption in 1999 is expected to fall to 9 kg, down 40 percent from 1989. Lower disposable incomes of Russian consumers, combined with higher food prices, reportedly increased the share of retail sales spent on food by Russian consumers to 50 percent in 1998. Prospects for higher inflation are expected to increase this ratio in 1999.
In 1999, imports are expected to drop in tandem with domestic consumption with imports forecast at 610,000 tons, only half of 1997 levels. Domestically supplied poultry meat will increasingly fill the shelves in Russian stores as the nearly decade-long slide in domestic production reverses itself.
Russian poultry meat output which increased slightly in 1998 due to low feed prices, increased regional government support and higher levels of investment in the industry is expected to jump 13 percent to 720,000 tons in 1999. Besides government support, Russian financial groups, foreign companies and meat processing plants are making investments in the poultry industry. This recovery in production is expected to dramatically drop Russia's import dependence on imported poultry meat which reached nearly 70 percent in 1997.
Hong Kong and China: Low Poultry Prices to Prompt More Imports in 1999
In 1998, despite a slow start to the year and expectations that slower economic growth in Hong Kong and China would lead to lower imports, shipments to these markets were robust. Initially, the fall-out from the "bird flu" crisis limited poultry meat consumption and imports in Hong Kong. In China, this resulted in lower prices and constrained import demand as Hong Kong restricted access for live birds coming from southern China.
Since the economic upheaval in Russia, however, lower international prices for broiler meat strengthened the pace of shipments to China via Hong Kong. Imports by Hong Kong over the last quarter of 1998 surged 16 percent over the same quarter last year pushing total imports to 915,000 tons. The United States remains the dominant supplier, supplying wings and frozen chicken parts at prices lower than competitors. Prices for U.S. chicken paws, however, in 1998 ($645/ton) were higher than most other suppliers.
In 1999, China is expected to increase imports of poultry meat 3 percent, to 820,000 million tons. Ironically, in the context of a sluggish economy, less disposable income is strengthening demand for cheaper chicken meat which often comes from imported chicken cuts rather than the more expensive locally raised yellow chicken. Rising domestic prices as production gains slow in 1999 to 5 percent are supporting increased demand for low-priced imports.
Imports continue to move into China from Hong Kong despite the Chinese government's adoption since July 1998 of a series of anti-smuggling measures. One of the measures is to require more documentation for re-exported products from Hong Kong to China. Small "transport companies" unable to fulfil the documentation requirements for their clients went out of business. The transportation cost for poultry products increased to RMB2000/mt ($241). Well-connected transportation companies survived and continue to do business as usual.
China's role in the poultry meat export market is being increasingly challenged by the wave of competitor currency devaluations and product quality concerns. While China continued to be Japan's major poultry meat supplier in 1998, strong competition from Thailand in the Japanese poultry meat market eroded China's competitive position. China's exports in 1998 dropped 4 percent to 354,000 tons as Chinese exporters struggled to match Thai prices. Chinese export prices for frozen broiler products to Japan are reported to have dropped from $2,600/ton to $1,600/ton.
In addition to price pressure, Japanese meat processing firms refrained from buying Chinese product in 1998, particularly chilled chicken meat, expressing concerns over the safety of Chinese product. The Japanese Health Ministry said it will send a study team to China in 1999 to investigate whether China has been using a sterilizer, banned for food use in Japan, on its meat. Chinese exports in 1999 are expected to continue their decline, dropping another 4 percent to 340,000 tons.
Japan: A Battleground for Market Share
Abundant global poultry supplies, combined with the changing competitive position of poultry meat suppliers, particularly Brazil as a result of its currency devaluation, imply intense competition for market share in Japan in 1999. This battle between exporters will be set in a context of economic stagnation and weak consumer demand in Japan, the world's fourth largest poultry import market.
Usually a market with stable demand for poultry meat, Japan experienced economic stagnation and problems with consumer confidence in 1998 which took a toll on consumption. A 4-percent reduction in poultry meat consumption in 1998 combined with excess breast meat stocks led to a contraction of poultry meat output. Lower domestic poultry meat prices in 1999 are expected to limit production gains.
Consumption in 1999 is expected to stay relatively stable with some uncertainty about food safety concerns. The most recent news about food safety occurred in January 1999 when contaminated poultry meat imported from Vietnam was found in the distribution channel. Additionally, the domestic industry is questioning the possible use of banned chemicals to wash birds. This concern stems from chilled broiler boneless leg meat from China that had a longer than average shelf life compared to domestic chilled meat (two weeks versus one week).
The importance of price in this high value import market for poultry meat was clearly revealed in 1998. While China remained the single largest broiler meat supplier to Japan in 1998, Thailand was the real overall winner in the Japanese market, increasing exports 34 percent from the previous year. Thai exports to Japan (mainly bone-in legs and highly portioned and semiprocessed boneless leg meat) reached 118,000 tons in 1998, pushing up their market share 6 percent to 24 percent.
The sharply devalued Baht allowed Thai exporters to take market share from Brazilian suppliers; Brazil's market share dropped 6 percent to 15 percent, with overall exports to Japan down a solid 28 percent from the year prior. This is a trend that might be reversed in 1999 as a result of the devaluation of the Brazilian Real.
The robust demand for U.S. broiler meat (mainly bone-in legs) in the early part of 1998 was hampered by the strong dollar during the second half of the year. U.S. exports to Japan, previously expected to drop in line with previous years, held steady at over 100,000 tons in 1998, accounting for 21 percent of the Japanese market.
Prepared chicken imports in Japan are the fastest growing component of poultry trade, with 1998 volumes rising 19 percent over the previous year and reaching around 92,500 tons, a stark contrast to stagnating generic broiler meat consumption in Japan. China has been focusing efforts on this value-added, prepared chicken product segment and is becoming increasingly competitive with Thailand, the top supplier of these products to Japan. China's low cost labor advantage over Thailand, coupled with major Japanese investments in joint venture food processing plants in China, are said to be offsetting Thailand's exchange rate advantage. Surpassing Thailand in 1998, Chinese exports of prepared chicken reportedly rose 30 percent over the previous year to a record 40,500 tons.
Prepared U.S. chicken product imports in 1998 reached around 12,800 tons, up 29 percent. These products, including turkey, are particularly favored by some Western-style fast food and home-delivery users. The home meal replacement (HRM) sector, including take-out, convenience and home delivery, is one of the few expanding and profitable segments of Japan's food industry and has driven imports of prepared poultry products in recent years.
Economic Slowdown in Mexico to Constrain Growth in Imports
Higher interest rates and an economic slowdown are dampening poultry meat consumption gains in Mexico. After a decade of over 6-percent annual poultry meat consumption gains, growth in 1999 is expected to slow to a more sedate 3 percent as slower gains in consumer purchasing power prompts the substitution of meats by corn, pasta and vegetables.
Mirroring slower economic growth, imports, which jumped 17 percent in 1998, are projected to increase only 3 percent in 1999 to 253,000 tons. Prospects of a weaker peso and uncertainty caused the proposed implementation of Mexican's new regulations on Avian Influenza may slow demand for imported product. Although imports of broiler meat are expected is grow only marginally, demand for low priced mechanically deboned meat (MDM) as an input for the domestic sausage industry remains strong. In fact, in December 1998 the Government of Mexico issued import certificates for 91,000 tons of MDM and turkey thigh meat for the first semester of 1999, which is well above the original NAFTA Tariff Rate Quota (TRQ) for 1999 of 63,760 tons.
While local production of MDM continues to be insufficient to meet the strong demand from domestic meat processors, pressure is being exerted by the Mexican pork industry to force meat packers to adhere to their commitment to increase purchases of domestic pork by 2 percent annually. There is a government-sanctioned requirement to receive TRQ import certificates for MDM. According to industry sources, the allocation for the second half of 1999 will likely be troublesome and heavily influenced by low domestic pork prices and political lobbying by Mexican pork producers who are suffering from burdensome supplies of domestic pork.
Output growth of the Mexican poultry industry, the fourth largest in the world, is expected to be constrained in 1999 by high interest rates and the industry's difficulty procuring feed requirements. Output is expected to reach 1.7 million tons, increasing 3 percent from 1998. Elimination of subsidized corn prices to ensure sufficient corn supplies for tortillas has led to domestic food and feed processors aggressively competing for the domestic corn crop. Reportedly, as of mid-January 1999, domestic corn prices were higher than imported product ($150/ton versus $130/ton). Currency fluctuations in 1999 are likely to be an issue for Mexican poultry companies which are heavily dependent on imported feedstuffs. According to the poultry industry, feed costs increased 15-20 percent in the beginning of 1999.
Industry sources indicate that the Mexican poultry industry is far more profitable than other livestock operations because of the use of modern technology, economies of scale, efficiency and integration. Processing facilities and distribution channels, however, are not well developed. Poor storage and product handling in wholesale and retail wet markets continue to be major challenges to overcome and present interesting investment opportunities.
Intense Competition in Global Poultry Market Expected in 1999
Plentiful supplies of poultry meat in 1999, combined with a forecast drop in imports by selected countries, portend a difficult year for poultry meat exporters. Global exports are forecast to continue their descent in 1999, registering a three-percent decline to a forecast 5.6 million tons, with only Brazil set to register export gains.
Strong competition in a lackluster global market is expected to keep a lid on international poultry meat prices which were already depressed going into 1999. U.S. leg quarter prices are already the lowest in 5 years while prices for whole bird exports from Brazil and the EU will be held in check by the devaluation of the Brazilian currency. At the same time Thai and Chinese export prices will be pressured by the Brazil's ability in 1999 to competitively market product in Japan.
Currency Devaluation in Brazil to Prompt Strong Export Gains
A spreading of the global economic contagion to Brazil and the resulting devaluation of the Real in January 1999 is leading to considerable uncertainty about 1999 prospects for the Brazilian poultry industry. Brazil continues to be the lowest cost producer of broiler meat in the world, turning out live broilers at a cost of around $0.29/pound, thus allowing Brazil to maintain its position as the world's second largest exporter.
Favorable net returns for the industry in late 1998, reflecting adequate soybean and corn supplies, combined with the lower value of the currency, are expected to prompt a 5-percent increase in production in 1999. This increase follows a difficult year for the industry which, in 1998, witnessed only marginal output gains. Broiler producers suffered from heat-induced high mortality of day-old chicks in 1998 and the pervasive effects of leukosis, a disease which limits growth in the breeding flock.
While the industry expects some support in 1999 to come from increased domestic consumption as retail broiler meat prices remain competitive with beef prices, the impetus for increased production comes from a more optimistic outlook for the competitiveness of Brazilian exports. This optimism comes after a troubled export performance in 1998, which reported a 6-percent decline in shipments and a 16-percent tumble in the overall value of exports to $740 million.
Economic turmoil in major poultry markets and difficulties matching U.S. price declines for leg quarters in the aftermath of the Russian crisis led to a decline in Brazilian exports to Japan and Russia by 25 percent and 52 percent respectively. Exports to Brazil's major market, Saudi Arabia, which absorbed nearly 30 percent of total shipments in 1997, slid more than 12 percent as that market increased its own domestic production.
Support for exports in 1999 is also expected to be generated through a recent agreement between the Brazilian Poultry Exporters Association (ABEF) and the Brazilian Agency for Export Promotion (APEX). This agreement, operated under a program similar to the Market Access Program (MAP) of USDA, provides R$4.5 million to promote broiler meat exports through increased promotion overseas. The promotion program will concentrate on market studies and participation in 19 food shows overseas. The agreement contains an export goal of US$1.2 billion in poultry export sales by the year 2002.
Thai Exports to Remain High Despite Strong Brazilian Competition in 1999
A more stable Thai economy in 1999, combined with a slight recovery in consumer demand and competitive broiler meat prices relative to other meats, should prompt a 2 to 3 percent increase in broiler production. The strong global demand for Thai frozen broiler meat in 1998 that generated a 47-percent jump in exports is expected to wane in 1999 as the devaluation of the Real makes Brazilian product more competitive in Thailand's major markets of Japan and the EU. The dramatic jump in Thai exports in 1998, fueled by the sharp devaluation of the Thai currency, occurred against the backdrop of the economic crisis in Thailand which lowered consumer's purchasing power and constrained meat consumption.
Sluggish overseas demand for Thai product can be evidenced by lower offer prices for Thai product in late 1998 and the first quarter of 1999. Prices for boneless leg quarters exported to Japan are currently cited at $1,700-1,800/ton, down 10 percent from the third quarter of 1998. Likewise, prices for product destined for the EU, typically boneless-skinless breast meat now valued at $2,500/ton, declined 7 percent over the same period.
In 1998 Japan accounted for 62 percent of uncooked meat exported from Thailand and 60 percent of further processed meat. Exports of cooked broiler meat are the fastest growing component of Thai broiler meat trade and 1998 was no exception, with cooked products jumping 48 percent to 60,943 tons, or 21 percent of total broiler shipments.
EU Poultry Meat Industry Challenged on Numerous Fronts
The Russian crisis, lower WTO subsidized export commitments, an overburdened pork industry and increasing government pressure for more stringent environmental regulations are setting the stage for a slowdown in EU poultry meat production in 1999. Growing at a slower rate than previous years, EU poultry meat output is being successfully challenged by cheap pork on the EU domestic market. In addition, the return of EU consumer confidence in beef is contributing to a slowdown in demand for poultry meat.
The strong export growth enjoyed by the EU poultry meat industry over the past few years came to a halt in 1998. In 1999 exports are projected to slip an additional 8 percent to 842,000 tons. The devaluation of the Brazilian currency is expected to generate extreme price competition in the Middle East for French whole birds, especially in the context of declining subsidized export limits which total 345,000 tons in 1999. Meanwhile, despite an increase in export restitutions for cuts destined for Russia in November 1998, Dutch exports are expected to continue their decline into 1999.
Despite the Russia crisis, the strong pace of French exports early in the year allowed poultry meat shipments in 1998 to jump 5 percent with only turkey shipments showing a decline. Prior to the Russian crisis, poultry exports (80 percent of which are destined to the Middle East and Russia) were up 15 percent.
Since August, a large share of the 7,000 tons/month French product usually destined for Russia moved to the Middle East while some turkey meat was shipped to Cuba and sub-Sahara Africa. Some shipments to Russia of mechanically deboned turkey meat, not subsidized by the EU, have resumed and are now at about 50-60 percent of their pre-crisis level of 3,000 tons/month. Bourgoin SA is the major French exporter of MDM to Russia and shipments appear to have continued, albeit at a lower level as prices dropped from around $0.30/pound to $0.18/pound.
Exports to France's traditional markets in the Middle East-Saudi Arabia and the UAE-declined in 1998 and are expected to be under additional pressure from lower-priced Brazilian product in 1999. Overall exports to the region in 1998, however, were boosted by large broiler meat shipments to Iran which was reported to have imported more than 33,000 tons in 1998. Nearly 64 percent of French poultry meat exports to third countries were subsidized in 1998, of which nearly all were frozen whole chickens shipped to the Middle East and the former Soviet Union.
Concern about waning export opportunities in 1999 has prompted the French industry to limit chicken placements and increase the time between production cycles. These production indicators imply a small decline in broiler production and a nearly 4-percent decline in turkey production in 1999.
A similar production decline is forecast in 1999 for the Netherlands where lower export prospects and cheap pork are limiting incentives to expand output. In addition, future growth in the poultry industry will be tempered by growing consumer concerns over animal welfare issues, the impact of poultry production on the environment, and more importantly, a new Dutch Government policy to restrict growth in the sector. The government proposal calls to restrict expansion in the industry of a maximum poultry inventory level of 100 million birds.
Dutch poultry meat exports in 1999, mainly broiler and turkey cuts, are forecast to decline 10 percent due to a heavy market dependence on Russia, the Baltics and Eastern Europe. The Dutch have been limited in their use of export restitutions due to the strong lobbying power by French companies which have been effective in directing the allocation of restitutions towards whole birds. In 1998 the overall mandatory decrease in subsidized quantities of poultry meat was reflected disproportionally on parts, with a 43-percent decrease in their allocation while subsidized whole bird quantities were reduced only 4 percent.
For further information, contact Nancy Morgan, (202) 720-1372.
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