January 11, 2018
Thai poultry's new strategic directions
Joint ventures, antibiotic phaseouts reposition domestic and export marketing strategies. The leveraging of localized broiler production, brand differentiated ready-to-eat meals and AGP-free status to get around trade bottlenecks.
By Eric J. Brooks
An eFeedLink Hot Topic
With its exports expanding far faster than that of any other chicken supplier, Thailand is once again the world poultry market's rising star. This can be seen in how Thailand may only account for 7% of world broiler exports and 4% of frozen chicken but supplies 30% of all value-added cooked chicken. That is twice China's 14% share of the world market for cooked chicken and or Germany's third ranked 10% share.
Moreover, for both traditional frozen and cooked chicken, Thailand's exports are growing faster than that of its competitors. Since 2010, Thai poultry integrators have leveraged their re-entry into the EU (2012), Japan (2013), South Korea (2016) and Singapore (2016) to nearly double their export volume, from a USDA recorded 432,000 tonnes in 2010 to an estimated 800,000 tonnes this year.
But Brazil and other competitors did not just give Thailand its old share of the world chicken market back. In fact, total chicken exports outside of the EU and Japan are still below 2004 levels –but probably not for much longer: While the quantity of Thai chicken produced and exported is expanding at a healthy rate, the chicken's quality and marketing relationships are also undergoing big changes.
For some time now, Thailand has been Asia's most technologically advanced broiler supplier –but with modern farming methods came the use of antibiotic growth promoters (AGPs). When the EU banned AGPs in 2006, Thailand began raising birds-for-export antibiotic free. Even so, it continued using AGPs in birds destined for domestic consumption or for export to countries with no restrictions on AGP use.
This is now changing. In October, CP announced that it would stop using AGPs that are "medically important for human medicine"in both its domestic and overseas broiler farming operations.
While it will continue using antimicrobials to treat sick birds, CEO Adirek Sripratak concedes that "Antibiotics use in animals has grasped global attention as it concerns food safety and public health."
Similarly, Betagro has stopped using AGPs in all its broilers, including the ones intended for domestic consumption. This turning away from using AGPs is already incorporated into marketing campaigns: At upscale Bangkok supermarkets, advertisements by Betagro proclaim that "our chicken is health conscious" and "raised without antibiotics." Rutjawate Taharnklaew, Betagro's vice president of R&D stated that "Within three years we will even stop using antibiotics to treat sick broilers."
Behind such high-minded moves is also a lot of unspoken political pressure: According to a study by Thailand's ministry of public health, antibiotic-resistant infections kill 38,000 of Thailand's 66 million people every year.
By comparison, in the EU where AGPs are banned, there were only 25,000 deaths due to antibiotic-resistant infections out of a population of 600 million people. Government pressure is further re-enforced by local consumer protecting NGOs, which have commenced regularly checking various supermarket chicken brands for the presence of antibiotics.
While phasing out AGPs from its domestically marketed chicken, integrators are using acquisitions and joint ventures to consolidate their recent overseas marketing gains. This is especially true with respect to Japan. According to the Thai Broiler Exporters Association, Japan went from absorbing 40% of Thai broiler meat exports in 2012 (when frozen chicken was allowed back into Japan) to 47% in 2015 and an estimated 53% in 2018.
This reflects several factors which make Thailand and Japan excellent poultry trading partners. First, Thailand's proximity to Japan, low labor costs and technical expertise in cooked chicken gives it a cost and (in the case of cooked chicken) quality advantage over Brazil, its main rival in Japan's poultry market.
Second, while the EU continues to be a big market, with its chicken import volume staying constant in the 680,000 to 700,000 tonne range for the last ten years, Thailand can only steal market share from competing Brazil –and it has already done so: After the EU permitted frozen Thai chicken to re-enter its market in 2012, Brazil lost 80,000 tonnes of market share.
Thailand's EU exports rose proportionately, from 200,000 tonnes in 2011 to 280,000 tonnes in 2015 –and EU law has capped them at that level ever since. Unfortunately, while the EU has given Brazil a 500,000 tonne export quota, it has capped imports of Thai chicken at 252,000 tonnes.
As a result, the proportion of Thai chicken exported to the EU has fallen from 43% in 2011 to 28% today. Essentially, large, gradually growing Japanese market absorbs over half of Thai exports. A handful of smaller Middle Eastern markets are growing more rapidly than Japan in percentage terms. Due to their lower starting volume, they only absorb 22% of Thai broiler meat exports and face more intense competition from Brazil.
With all these considerations in mind, Thai integrators have opted to deepen their business ties with Japanese chicken importers. Within a year after Japan re-allowed Thai frozen chicken back into its market, CP for example, made a large equity swap with a top Japanese poultry importer: Buying 4.9% of Japanese trading house Itochu for ¥102 billion (US$1 billion) –while selling 25% of it agribusiness subsidiary CP Pokphand to Itochu for ¥87 billion ($854 million).
In early January, Mitsubishi announced that a ¥6 billion (US$53.3 million) export-oriented joint venture with Thai integrator Betagro and Japanese meat processor Itoham-Yonekyu Holdings (which is 39% owned by Mitsubishi). A new plant that will steam and freeze chicken meat into exportable ready-to-eat meals will be constructed in the Thai province of Saraburi, 90km north of Bangkok.
It is scheduled to commence production in October and be 50% owned by Mitsubishi, with Betagro and Itoham-Yonekyu each holding 25% equity. With a capacity to process up to 30,000 tonnes of chicken meat a year, most of its output will be exported to Japan, with the remainder being shipped to Hong Kong, Singapore or Thailand itself.
This new chicken processing cooking, freezing and packaging plant is also conveniently situated just south of an existing chicken slaughterhouse. Processing 90 million broilers annually, Mitsubishi has a 25% stake in the 75% Betagro owned slaughtering and processing facility that will supply the new plant.
In October of last year, Nippon Ham paid ¥9 billion (US$79.1 million) for 30% of Panus Poultry, a midsize farm-to-fork chicken farm operator and meat processor. Producing popular processed items such as chicken nuggets and breaded frozen chicken parts, Nippon Ham wants to boost Panus's exports (mostly destined for Japan) from 20,000 tonnes in 2017 to over 50,000 tonnes. To do this, it intends to more than double Panus's present output of 166,000 chickens/day to over 400,000/day.
Collectively, these investments profoundly expand Thai poultry's marketing footprint and distribution network in its largest export market. They are in fact a continuation of joint ventures and investments that Thai integrators were making into Japan's market before 2005's bird flu outbreak upset their budding relationship back in the mid-2000s. Even during the eight years its frozen chicken was banned from major export markets, Japanese importers kept investing in Thai cooked chicken for export.
With Thai chicken regaining its Asian region advantage over Brazil, the relationship between Thai chicken supply and Japanese demand is ramping up to new levels of integration.
Japan is of course, by no means the only destination for Thai poultry's considerable mass of overseas investments, which span over two dozen countries in Europe, Southeast Asia and the Indian subcontinent. Within Asia, South Korea and Singapore's re-allowing of frozen Thai chicken back into their markets portends higher East Asian export volumes at Brazil's expense.
--But even so, Thailand is no longer waiting for its exports to be re-allowed into this or that country: For example, to get around the EU's 252,000 tonne annual export cap, it is focusing on localizing chicken meat production in its EU exporting rival, Poland.
Just after 2018 commenced, CP announced it was buying a 33% equity stake in leading Polish poultry integrator SuperDrob for €49.5million (US$58.9 million). SuperDrob has already made clear its intention to use CP's capital injection to boost both its output and product offerings. Jarosław Kowalewski, SuperDrob's vice-president for strategy stated that with CP's investment, "We can increase production capacities" and, "We will extend the range of products and we will integrate [CP's] production and logistics processes."
For CP, the deal allows it CP to sell chicken throughout Europe from a Polish export base without worrying about trade restrictions. CP CEO Adirek Sripratak stated that Poland, "Has vast resources and potential with low cost of production. This will also help respond better to the regional consumer base at a faster pace."
This comes just two weeks after CP's late 2017 takeover of Bellisio Foods, which is America's third largest frozen foods and ready-to-eat meals, for US$1.08 billion. An established contract maker of processed foods for brands such as Eating Well, Michelina's, Boston Market, Chili's and Atkins, the deal matches CP's advanced capabilities in convenience food technology and high-end, segmented product marketing with rising American demand for convenient, easy-to-prepare antibiotic-free chicken meals.
Moreover, with the Trump administration pressuring Thailand to open its market to US chicken exports, CP can see the day when it may have to compete against US chicken in Thailand's own market. Bellisio's acquisition enables CP to start gaining a piece of America's chicken market before the US can export its own chicken back to Thailand. Moreover, with CP already having eliminated AGPs from its chicken supply chain, it puts its own products at an advantage in markets like America, where producers are still gradually phasing them out.
Similarly, India, like Thailand is now under pressure to open up its vast chicken market to US poultry meat exports. CP's plan to invest US$400 million in India by the mid-2030s reflects a similar, long-term strategic perspective: It will begin growing chickens to sell back to India's own people within India today. Later, if American pressure succeeds in opening up India's to foreign chicken, CP will have in place a pre-existing distribution network that will enable its exports to rapidly take Indian market share.
For while a phase-out of AGPs and distant overseas investments may seem unrelated, at a deeper level, they are deeply connected. Thailand is a developing country that successfully exports chicken to rich, mature economies. Proximity to large markets like Japan, advanced meat processing technology or low labor costs are only part of Thai poultry's success story.
Bird flu banished Thai chicken from world markets for eight years –while America's epidemic got mere regions of the United States banned for a mere few months at a time. From this, Thailand learned that to sell chicken overseas, it needed top-notch political connections, business arrangements and public relations as much as it did low production costs.
Aside from making it easier for its chicken to pass through Japanese customs, ever-tightening, investment-based alliances with Japanese importers make sure that if bird flu ever breaks out again, Japanese stakeholders lobby for against Thai chicken from ever being banned the way it was 2004. That helps safeguard a Japanese market that will absorb over half of Thai chicken exports for the next decade.
Similarly, investments in American and European processing capacity enables Thai producers to leverage their expertise in value-added processing and creating unique anti-biotic free ready-to-eat meals without going through the political and legal loopholes of exporting.
Moreover, in both export-oriented joint ventures and their investment in overseas production facilities, Thai integrators have deliberately opted to forgo wholly owned subsidiaries in favor or joint ventures with local partners. Should pressure to limit Thai poultry exports arise, a local stakeholder ensures that there is always someone to lobby for liberalized trade arrangements.
Hence, we can see immediate benefits in Thailand's Japanese, export-oriented Japanese joint ventures and a longer-term trade strategy at work in its Indian, European and American investments. One thing is for sure: Thai integrators are making sure that should the pressure to have its exports banned ever arise again, there will be importing country stakeholders –and brand conscious consumers– to speak on their behalf.
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