April 5, 2014
America's broiler sector takes flight
With steady prices and reasonable feed costs, its unit costs, consumption growth and trade fundamentals have caught up to those of Brazil.
by Eric J. BROOKS
An eFeedLink Hot Topic
Even as bird flu, Asia's economic slowdown and re-entry of Thai frozen chicken weaken world poultry market fundamentals, America's broiler sector is having an above average year. Although late 2013's aggressive broiler inventory expansion softened prices, they are staying ahead of feed costs, though a certain amount of adaptation was required.
Profitable, but less so than before
Previously, mid 2013 had seen broiler prices rise even as feed costs fell 30% over the previous six months. As US feed costs fell by more than those of other producers, this gave America's broiler integrators exceptionally strong revenue margins for much of 2013
After peaking in mid 2013, American broiler part prices declined an average of 20% over the next six months, while feed costs fell only 10%. Thereafter, chicken prices levelled out and remain flat at the time of publication.
Consequently, according to USDA and Bloomberg figures compiled by Rabo AgriFinance in its latest poultry report ("Rabobank Poultry Quarterly Q1 2014"), the gross margins of US broiler integrator earnings before interest and taxes (EBIT) peaked at 9.1% in the second quarter of 2013.
Rabobank estimated that integrator EBITs declined to 8.4% in the third quarter, when feed costs bottomed out but prices for export oriented chicken parts started to decline. Thereafter, the profit cycle made a sharp turn.
From mid-September onwards, prices fell by 20% as feed costs started to recover, further cutting margins. Since the start of 2014, US chicken prices have stayed roughly flat but a 20% rise in corn costs and 8% rise in CBOT soy futures probably slashed broiler integrator EBIT margins into the 6.0% to 7.0% range during the first quarter of 2014.
Although that is a still a respectable return compared to the massive losses incurred during 2011 and 2012, the sudden, unexpected turn in market sentiment has altered the sector's short-term plans: Previously, the USDA stated that, "Broiler integrators had been expected to expand production in 2014 primarily due to a decline in feed costs from a year earlier."
Now, with feed costs rising unexpectedly and gross margins narrowing 40% from their mid-2013 peaks, deteriorating net earnings and anxiety about further feed cost increases decelerated an aggressive 3%+ pace of broiler inventory expansion that was underway in the early part of last year's third quarter. By January, chick placements were a mere 0.5% higher than a year earlier.
Broiler numbers under control, dark meat in oversupply
With live broiler inventory growth decelerating to a USDA estimated 1% in 2013, integrators will deal with the prospect of rising feed costs by boosting slaughter weights and minimizing flock expansion. Broiler weights were 1.4% higher in January than in the same month of 2013. With feed costs rising, we believe integrators will be motivated to boost weights by 1.3%, implying that broiler output should increase approximately 2.3% from the previous year's total, down from the 2.8% previously projected by the USDA.
While live broiler numbers are well under control, chicken meat inventories are more problematic, but not in a straight forward manner. At 689,000 tonnes, estimated January chicken part inventories were 3% higher in January than a year earlier. By March however, the USDA's WASDE report estimated closing 2014 broiler part inventories total 650,000 tonnes. That is up 10% since 2011, but will be 2.8% lower than their 2013 closing level.
Even so, this aggregate chicken meat inventory total hides considerable market divergence across various broiler parts. With America's economy recovering faster than that of any other industrialised country, declining swine and cattle inventories is leading to high beef and pork prices. The resulting consumption shift from red meat to chicken is making US poultry demand increase 2.5%, nearly in line with the world market and exceptionally fast for a mature, fully developed economy.
Similarly, January inventories of parts popular in America's domestic market such as whole bird and white meat breasts fell. As a result, from mid 2013 to the present time, whole birds never fell by more than 2% in price and were back at their 2013 level at the time of publication.
On the other hand, export-oriented dark meat parts clearly encountered an oversupply situation; as did wings, the only export-oriented white meat cut. Drumstick inventories jumped 19% from the previous year's level, while leg quarters and thighs jumped 24%.
These parts also bore the brunt of chicken market deflation. In the three and half months from mid-September through to the end of 2013, leg quarter prices fell 20%. Chicken wings, the only export-oriented white meat part, fell 25%.
That is partly due to Mexico's recovery from an avian influenza's outbreak, which reduced export demand for bony white meat parts such as wings and dark meat parts like leg quarters. The price drop was also induced by Brazil's currency, which fell 15% against the US dollar in 2013 and is down 31% against the greenback since late 2012.
That discounted Brazilian poultry's world market price relative to US chicken. The resulting substitution of Brazilian bony and dark meat cuts on the world market led to the inventory accumulation and price deflation of these parts in the United States.
The price deflation in dark, boney parts inevitably impacted bottom lines, especially after feed costs turned upwards early this year:
Rising competitiveness against rival Brazil
Despite these problems, the US broiler industry remains in better condition than most of its rivals -and is even starting to give Brazil a run for its money in the world export market. With world broiler export demand growth decelerating, the re-entry of Thai chicken, into the EU in 2012 and this year into Japan, has greatly intensified the export market competition that Brazil, the US's main rival, faces.
Although some overseas sales were lost to Brazil due to its aforementioned cheapening currency, there is actually very little overlap in dark, bony parts between US and Brazilian exports. Brazil, on the other hand, is contending with the re-entry of Thai frozen chicken, first into the EU and now Japan. Similarly, thanks to rising wages, fuel and transport expenses, Brazil's chicken production costs went from 60% of the US level in the late 1990s to nearly equal today.
As a result, in the years 1997 to 2012, American broiler exports rose by an average of 4% annually. While impressive, that was nowhere near Brazilian broiler exports 11% annual increase over this same time. From 2011 to 2014 however, Brazilian chicken exports will have increased a mere 4.2%. By comparison, despite contending with slowing Asian economic growth and Brazil's plunging currency, from 2011 to the 2014, American chicken exports will have risen 8.5%, more than double Brazil's pace of the past three years.
By comparison, not only is US poultry's chicken part export profile different from that of Thailand, but its large domestic market is holding up well compared to that of other producers. Brazil's per capita chicken consumption of 48kg is a now a whopping 28% higher than America's 37.8kg, leaving the US domestic market more room for additional consumption gains.
Surprisingly, from 2011 to 2014, Brazil's domestic consumption will have fallen 0.3%, while US consumption will have risen 3%. We don't expect America to greatly outrace Brazil in domestic consumption growth, but the US's substantially lower per capita consumption means that over the next five years, its improving export competitiveness is being augmented by slightly greater scope for domestic consumption increases.
US poultry's improving fundamentals recently got a vote of approval with two substantial new investments: Sanderson farms, which accounts for 8% of American broiler production, announced that construction would begin on a Texas processing plant that had been previously delayed by 2011 to 2013's high feed costs and market volatility. Similarly, Peco foods, which accounts for 3% of US production announced in March that it will break ground on constructing a hatchery, feed mill and processing plants with 1,000 workers in Arkansas. Both facilities are expected to be operational by the end of 2015.
Over the medium term, the USDA's anticipated growth of near 2.5% for both domestic consumption and exports could be exceeded: With beef and pork prices staying high, the USDA in all likelihood underestimated the extent to which chicken will be substituted in place of red meat. That in turn should help bring down inventories of bony and dark meat, fuelling a modest increase in both average US broiler prices and integrator profit margins.
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