April 30, 2018
Brazilian chicken's maturity challenges, MENA woes
An oil price crash followed by a religious ban on meat from stunned birds puts exports to the Middle East North Africa region in a tailspin and halts export growth. It's one chapter of a longer-term deceleration and maturing of the country's once fast-growing poultry sector.
By Eric J. Brooks
An eFeedLink Hot Topic
Although Brazil is a leading, dominant supplier of meat, its trade fortunes have always been erratic. In the past, its beef and pork trade has seen spectacular growth booms get dramatically cut down by trade bans, recover very strongly, only for another mass importer's trade restrictions to deliver yet another setback.
Similar circumstances are now challenging Brazil's poultry sector, which accounts for 35% of world chicken meat exports. 2018 will probably mark the fourth straight year that analysts had predicted Brazil would break the 4 million tonne chicken export barrier -and failed to do so. Due competition from tier 2 chicken meat suppliers, the whims of importers and misfortunes of its own making, the years since 2014 have been frustrating ones.
Even though it had overtaken America as top chicken exporter in the mid-2000s, Brazilian chicken meat exports continued to grow. Whereas the 2000s saw Brazilian chicken assume dominant import market shares in Europe and Japan, the last decade has seen the Middle East North Africa (MENA) region account for a critical proportion of poultry meat shipments.
From slightly over a tenth of exports in the early 2000s, Brazilian MENA region exports totaled 32% of its shipments, totaling slightly under million tonnes of exports by 2007. They then doubled in just six years, stabilizing in the 2.1 to 2.3 million tonne range from 2013 through 2017 inclusive, making up around 55% of Brazil's poultry meat shipments throughout the mid-2010s.
MENA's market was as unequal and lopsided as it was lucrative. It included everything from nations like Egypt, which has lower consumer incomes than China to Saudi Arabia, whose government and citizens are flush with cash. Saudi Arabia dominated, single-handedly buying 700,000 to 800,000 tonnes or 18% of Brazilian chicken exports in recent years. It imported more Brazilian chicken than any other nation and accounted for approximately 36% of its chicken exporters' MENA trade.
After 2015, crashing oil prices halted meat demand growth in numerous oil dependent MENA nations. It coincided with intensified competition from Thailand's chicken in Asia Pacific and Poland within the EU. Faltering MENA economies resulted in stagnant export volumes and caused Brazil's poultry sector to come short of export forecasts for several consecutive years.
Even before this setback, Brazil's recession-bound economy had caused production to come in below projections for most of the last five years. For example, 2016's 12.91 million tonnes of production came in below the USDA's earlier projected 13.03 million tonnes. That was mostly due to domestic consumption, which at 9.02 million tonnes totaled less than the 9.28 million initially projected.
At 13.15 million tonnes (instead of 13.25 million initially projected), 2017 production also came in below expectations, but for a different reason. With Brazil's economy recovering, a 57,000-tonne upward revision in domestic consumption could not fully offset exports coming in 153,000 tonnes below expectations -and at 3.847 million tonnes, 1.1% below 2016's volume.
Even before Saudi Arabia banned chicken meat from stunned birds, Thailand took more market share than was expected in Southeast Asia, Japan and South Korea. Poland and Thailand made for a disappointing EU export performance, as shipments to the continent fell a steep 18%, from 219,000 in 2016 to 185,000 tonnes last year.
The Q2 scandal revelations of Brazilian customs inspectors allowing tainted meat to be certified and exported caused its chicken shipments to many parts of the world to be delayed, including China, Europe and some MENA nations. All this was compounded by a politically inspired economic blockade of Qatar, which made it impossible to make some of its planned export shipments to that nation.
Partly due to worsening Saudi economic conditions, partly due to higher domestic chicken production, Brazilian broiler meat exports to the country fell from over 800,000 tonnes in 2015 to 653,000 tonnes in 2016 and 529,000 tonnes last year.
For the past two years, it was able to partly make up the loss of its Saudi market share by diverting its MENA exports to neighboring countries. For example, after a currency devaluation made it impossible for Egyptian farmers to raise as much poultry as before, exports to that country climbed 67%, from 97,203 in 2016 to 162,775 tonnes in 2017. Similarly, Iraq's recovering economy induced a 68% increase in imports of Brazilian chicken, from 2016's 71,862 tonnes to 120,797 tonnes in 2017.
Best of all, the redirection in exports was in tune with changing Saudi tastes. Even when Saudi exports fell, those of whole chickens (which made up 72% of 2015 exports to that country) fell 31% from 2015 through 2017, while chicken parts exports actually increased 7% over this whole time. On the other hand, with Egypt only allowing the import of whole chickens and Iraqi consumers also preferring complete birds, it was possible to redirect over half the whole chicken exports into the growing import demand from Egypt, Iraq and Libya.
The hammer blow came down in early 2018: When Saudi Arabia declared it would no longer allow in chicken meat from stunned birds, it disqualified several large processing plants from exporting to that country. Over the long term, Brazil is expected to retool these facilities so it can resume exporting to Saudi Arabia. Even then however, with domestic Saudi and UAE chicken production rising, it will be difficult to achieve previous export volume levels to these nations.
Over the short term, the USDA expects Brazilian chicken exports to Saudi Arabia to fall 42%, from 780,000 tonnes in 2017 to 450,000 tonnes this year. With Qatar's land borders still under an economic blockade, Brazil's chicken exports to that country will decline 46%, from 140,000 tonnes in 2017 to a USDA estimated 75,000 tonnes this year.
But it is not enough to make up for losing nearly half its Saudi market share. The USDA concluded that within MENA, "Growth markets (Egypt, Iraq, Libya, Oman and UAE) will not offset declines spurred by Saudi Arabia's implementation of a ban on stunning and the regional trade blockade of Qatar."
Despite these setbacks, MENA's dependence on Brazilian chicken cannot be understated. Before Saudia Arabia's recent ban, it supplied 80% of Saudi imports and 40% of its chicken consumption, 70% of imports and 61% of chicken consumption in the UAE and around 10% in Egypt, whose population exceeds that of Saudi Arabia and the UAE by several times.
Over the long run, Brazil has a stronger comparative advantage in MENA than it does in Asia Pacific, Europe or North America. Over the short-term, MENA region exports will fall from 2.3 million tonnes in 2016 and 2.2 million tonnes last year to a little over 1.8 million tonnes this year.
It means that for the time being, Brazil will have to console itself with a recovering domestic market. Its recovering economy will boost chicken consumption 3% to 9.584 million tonnes, having broken free of an apparent 9.3 million tonne consumption ceiling for the first time since 2015.
Even so, with exports staying flat in the 3.8 to 3.9 million tonnes range for a fourth consecutive year, 2018's projected 2.5% growth to 13.487 million tonnes looks more like a US poultry growth rate than a Latin American one. -And if truth be known, Brazil's poultry sector has been growing more slowly than that of North America.
After rapid annual consumption (5.7%) and export (13.3%) growth powered a 7.2% growth rate, the years since 2011 have seen near zero growth in domestic consumption (0.2%) and exports (1.7%) result in Brazilian broiler production (0.7%) expanding at less than half the rate of its US competition.
While the MENA market should eventually recover and its domestic economy does too, it does not change the following fact: Both Brazil and the US have lost market share to tier 2 competitors such as Thailand, Argentina and more recently, Poland. Brazil's market share of world exports peaked near 40% in the late 2000s and is now near 35%. Perhaps a re-think of its trade strategy is required.
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