February 20, 2019
Brazilian poultry's diminished expectations
High feed costs, faltering returns hold back production as import barriers blunt trade prospects. Tier 2 exporters take significant market share from the number one chicken meat supplier.
By Eric J. Brooks
An eFeedLink Hot Topic
It's a hard time to be Brazilian poultry grower. 2018 was expected to be a difficult year but turned out even tougher than expected. Alongside losses caused by high feed costs and a national trucker's strike, three major export markets all either temporarily banned Brazilian chicken or boosted import tariffs.
From January 2018 through May inclusive broiler production costs exceeded prices –and did so by 14% to 30% in the last three months of this period. 25% to 30% feed cost inflation was specific to Brazil, where soymeal prices had been inflated by Chinese buyers eager to avoid tariffs on US origin soybeans.
By mid-2018, even with production costs were running 25% to 30% higher than a year, broiler finally returned to net profitability. They did so by becoming expensive enough to dampen both domestic and foreign demand for Brazilian chicken. With H2 2018 chicken prices nearly 30% higher than before, domestic chicken consumption came in below expectations.
Instead of rising 1% to 9.866 million tonnes, 2018 domestic chicken consumption fell 1%, to 9.671 million tonnes. While improving economic conditions should make consumption rebound 2% to 9.863 million tonnes, this is a whopping 7.5% less than the 10.066 million tonnes the USA previously expected for 2019.
Nor is there much relief in store going into 2019: While soymeal costs have tapered off in recent months, a new geopolitical tension threatens to boost chicken production costs: January and February (when no corn is normally exported) saw Brazilian corn being shipped to Iran, as it becomes the only country willing to break a US-led economic sanctions on the latter. According to a February 19 report in AgriCensus Daily Report "Line-up data for Brazil's principal ports in Santa Catarina and Rio Grande do Sul - Rio Grande and Imbituba - shows nearly 650,000 tonnes of corn either loaded, loading or recently sailed."
This has caused local corn shortages in these coastal states, forcing them to import supplies from Argentina and boosting local feed prices. From Q2 onwards, it remains to be seen if China's once again sources 90% of its soybeans from Brazil –and jacks up chicken production costs for a second consecutive year.
With nearly three-quarters of chicken consumed domestically, high chicken prices caused a predictable fall in both output and domestic consumption. From 2017's 13.61 million tonnes, it dropped 1.8% to 13.355 million tonnes, far more than the 0.4% drop initially expected. For 2019, output is now projected to rise 1.8% to 13.6 million tonnes, significantly below the 13.8 million tonne output that the USDA had projected just a few months earlier –or the 14.5 million tonne output that had been projected for 2019 back in 2015.
After nearly five years of recessionary economic conditions, Brazil's economy is expected to grow 2.5% in 2019. That is still far below Brazil's longterm GDP growth rate and cannot fully compensate for a disappointing export forecast. 2019 output is only expected to increase by 1.8%, to 13.598 million tonnes, significantly less than the 13.81 million tonnes initially projected by the USDA just several months ago.
Alongside domestic economic woes, diminished industry expectations have coincided with diminished export prospects. Saudi Arabia, the EU and China are Brazilian chicken's three biggest customers. They absorbed 29% of 2017 exports but all three turned against Brazilian chicken last year.
China declared Brazil had dumped chicken into its market and slapped a trade tariff. The dispute was recently resolved when Brazilian exporters
The biggest blow was Saudi Arabia declaring that Brazil's slaughtering of birds via electric stunning violated its laws for the importation of halal meat. While impressive export growth was recorded in Mexico (+17.4%, 111,300 tonnes exported), Yemen (+25.7%, 85,500 tonnes), Philippines (+47.8%, 52,500 tonnes), Singapore (+17.2%, 97,700 tonnes), these small markets could not compensate for export losses in large markets.
While Brazil has now changed how it slaughters chicken destined for Saudi Arabia, 2018 exports to its top buyer fell a steep 17.4% or 103,000 tonnes. The fall in shipments to Saudi Arabia greatly outweighed all the export gains made in Mexico, the Philippines, Yemen, Singapore and other nations combined. Total exports to several other large importing nations fell by almost as much as shipments to Saudi Arabia, making a bad situation worse.
To make matters worse, Brazil's newly elected government fulfilled a campaign promise to move its Israeli embassy from Tel Aviv to Jerusalem. This deeply upset Saudi Arabia, who subsequently reduced the number of Brazilian chicken meat processing plants approved for export from 55 to 25. This will make it difficult for Brazil to export 500,000 tonnes of poultry meat to the Saudis, much less than 700,000 tonnes it once shipped to them.
From nearly 590,000 tonnes in 2017 and 486,000 tonnes last year, the industry consensus is that chicken exports to Saudi Arabia will fall to a little over 400,000 tonnes in 2019. Moreover, 2018's ban forced Saudi buyers to import more chicken from Turkey, a Muslim country whose halal chicken slaughtering status can be taken for granted.
Similarly ever since Japan lifted its ban on Thailand's chicken, Japanese importers have leveraged their joint ventures with Thai integrators to boost imports of the latter's poultry meat at Brazil's expense. Lower transport costs and Japanese importers' preference for Thai chicken caused a 10.6%, 47,000-tonne drop in 2018 exports to Japan.
After Q2 2018, the European Union slapped import restrictions on Brazilian chicken, causing 2018 exports to the EU to fall 5.4% or 10,000 tonnes, to 175,000 tonnes. The USDA reports that "The European Union maintains the suspension of 20 Brazilian plants to export chicken meat to the bloc. The suspension affects most of the traditional and large Brazilian packers."
Over the long run, Europe's preferential tariff treatment of chicken from Poland, Ukraine and Turkey makes it even harder for Brazil to recapture its formerly large EU market share. The EU's Polish-led chicken meat exports expanding by 5% this year. Alongside this EU's domestic supply surge, Europe's growing fondness for Thai chicken makes it difficult for Brazil to ever boost its EU exports back into the 250,000-tonne range it took for granted a decade ago.
Similarly, Egypt followed Saudi Arabia's lead and switched its chicken imports to those of Turkey, causing Brazilian exports to that nation to fall from 162,000 tonnes in 2017 to 58,000 tonnes last year. With ISIS defeated and no longer terrorizing its land borders, Iraq resumed mass imports of Turkish chicken, causing Brazilian exports to fall by 13% or 16,000 tonnes.
Venezuela's financial default caused all 20,000 tonnes of exports destined to that nation to be lost.
With large market export losses swamping the gains in smaller markets, tier 2 exporters including Thailand, Poland and Turkey took advantage of Brazil's weak position. As a result, in a year when world broiler exports expanded by 1%, Brazilian exports (including chicken feet) fell by 4.1%, from 4.089 million tonnes in 2017 to 3.923 million tonnes last year. If chicken feet are not included, exports fell 4.2%, from 3.847 million tonnes in 2017 to 3.687 million tonnes in 2018.
Nor is their much room for improvement this year: Beset by the prospect of further export losses in Saudi Arabia and facing stiff competition from Thai, Turkish and Polish supplies, exports are projected to rise a USDA estimated 1.3%, to 3.735 million tonnes (3.973 million tonnes if one includes chicken feet). That's only one-third as quickly as the USDA projected 4.2% increase in 2019 chicken meat exports. Moreover, the tendency for Brazilian chicken exports to stagnate is turning into a longer-term trend.
From 2017 through 2019 inclusive, Brazilian chicken exports fell 2.8% or by 116,000 tonnes. Over these same two years, world chicken exports will have risen by 5.3% or 580,000 tonnes, with non-Brazilian exports increasing by an even faster 696,000 tonnes. As a result, from 39% of world chicken meat exports in 2008, Brazil's share slipped to 33% in 2018 and will fall to 32% this year.
World number two exporter America is enjoying a 3.4% 108,000-tonne export increase from 2017-19 but it is not the greatest beneficiary of Brazilian poultry woes. In 2010 chicken exports from tier 2 suppliers Thailand, Ukraine, Poland, Turkey and Argentina amounted to 26.5% of Brazilian shipments. By the end of this year, these four tier 2 suppliers will ship chicken volumes equal to 54% of Brazilian exports.
Thailand is by far the greatest beneficiary of Brazil's eroding poultry market share, as it more than doubled exports since 2010. This was achieved by re-taking large portions of Brazil's share of EU and Japanese markets after 2012, when they removed an eight-year ban on Thai frozen chicken.
Going forward, longstanding ties between Japanese importers and Thai integrators gives the latter marketing advantages in Japan. Thai frozen chicken enjoys lower transport costs to East Asian destinations and its high-value, branded cooked chicken has no Brazilian equivalent. In large Middle Eastern markets, Turkey will make the best of Brazilian chicken's trade-handicapped status to increase its share of geographically close and religiously similar markets.
The prospect of rapid growth in Chinese exports cannot completely offset the steady market penetration of tier 2 chicken meat exporters or American suppliers. US exporters have fully recovered from their mid-decade bird flu outbreak and have just regained their tariff-free access to Mexico's large market.
With per capita chicken consumption already at 47kg, Brazilian broilers need a new round of trade liberalization to compensate for a domestic market that is not growing as fast as it once did.
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