FEED Business Worldwide - April, 2012

 

Thai poultry approaches its moment of truth 

 

by F.E. OLIMPO in Bangkok

 

 

There are times when broilers are having a rough year but this is offset by good profits for layers. At other times, strong broiler exports can offset a weak performance in layer lines. In that situation, loss-making layers can be even be profitably culled to boost broiler profits. This year however, 2012's first quarter saw low prices afflicting Thai egg laying and chicken lines simultaneously.

 

 

 

The price of Thailand's live broiler hit THB24/kg (US$.78/kg) in mid-March, less than half of what it was ten months ago when it reached more than THB55/kg (US$1.79/kg). In fact it didn't go this low even during the 2009 global recession, when despite an export meltdown, it only fell to THB30/kg (US$1.00/kg).

 

Moreover, this price deflation could not have come at a worse time. Due to heavy crop damage during Thailand's severe flooding from September to November of last year, corn costs 20% more than five months ago. Soy prices similarly spiked because of a drought in South America. The current cost of production, according to Charoen Pokphand (CP) Foods, Thailand's largest chicken producer and exporter, is THB33/kg to THB34/kg (US$1.07/kg to US$1.11/kg), meaning that most farms are suffering a substantial net loss of THB7/kg (US0.23/kg).

 

Moreover, this problem isn't unique to the broiler sector. Egg producers recently asked Thailand's Commerce Ministry to raise the legislated floor price of eggs. The government had earlier set their price at THB2.40/egg (US$0.08/egg) on average, while production costs have soared to THB2.64/egg (0.09/egg). In fact, despite a government-imposed price of THB2.40/egg, the real market price is in fact much lower.

 

 

 

So what's behind the Thai poultry industry's current price deflation? The simple answer is oversupply. From 2010 until early last year, egg prices rose to record highs, reaching THB5/egg (US$0.16/egg) at one time. The price inflation came in the aftermath of a nationwide outbreak of New Castle disease that killed millions of layers. To address the subsequent egg shortage, layer inventories expanded aggressively, with farmers forgetting that fact that the domestic egg industry had long-term oversupply problem. Naturally, the shortage soon turned into an unmanageable surplus.

 

Before the New Castle epidemic in 2010-2011, the country was producing 27-28 million eggs a day as against consumption of only 25-26 million a day.  That leaves a surplus of 2 million eggs per day or nearly 8% of output. The situation worsens from October every year, when 30% of Thailand's population shuns animal proteins (eggs included), to celebrate a ten-day vegetarian festival.

 

This leaves a surplus of 70-80 million eggs at the end of the festival, resulting in a recurring, late year price depression. Increased fourth quarter exports is the only way out of this yearly predicament but with most nearby countries fiercely protecting their domestic layer industry, that is easier said than done. 

 

At this time, Thai egg exports are limited to about 22-23 million pieces a month, going mostly to Hong Kong. There have been efforts to expand the market - to no avail. Aside from the fact that the shelf life of eggs is short, global competition is simply tough and throughout Asia, trade barriers against imported eggs are high. Hence, the present layer price deflation is part of a longer-term, oversupply trend in the country's egg market.

 

 

 

By comparison, Thailand's broiler sector is far more fortunate. Given its strong overseas orientation, it doesn't suffer as much pain as the layer sector does after every vegetarian festival.  Severe as it is, the present round of chicken price deflation still qualifies as something economists would call a market correction.

 

Chicken prices started plummeting in February, a situation that broiler farms blamed on high local inventories amid a seasonal slowdown in overseas shipments. Until January, Thailand's live broiler fetched THB39.50/kg (US$1.29/kg) on the average. But the first quarter being a low season in exports, a softening in prices wasn't totally unexpected.

 

Nevertheless, nobody expected the price to tumble as low as THB30/kg (US$1.00/kg), much less bottom out at THB24/kg (USR$0.78/kg). 

 

GFPT, one of Thailand's leading broiler exporters, had anticipated the price to be at least THB38/kg during the first quarter of 2012. The situation overseas of course was dire, it admitted. The import price of cooked chicken in Europe, one of Thailand's main markets, had slipped to US$3,800-4,000/tonne, down some 8.3% from US$4,200-4,300/tonne a few months back.

 

A domestic oversupply and weak overseas prices are clearly the culprits in the current chicken-price deflation. Since after last year's floods, production has shot up to 22 million birds a week, from only 20 million before, again thanks to uncontrolled inventory expansions by the country's major players.

 

But unlike in the egg sector (and despite the short-term losses it is causing), the broiler sector's inventory expansions are strongly justified by the circumstances. In 2011, Thailand's chicken exports last year grew by 6.5% to 7% and initial indications showed growth this year could reach 9%. - More importantly, despite suffering large losses early this year, Thai integrators  have an important long-term, export-oriented reason to boost poultry inventories.

 

Indeed, the imminent lifting of the EU's ban, along with the earlier lifting of Japan's ban on frozen chicken, has been motivating a rash of capacity expansions in Thailand's broiler industry.