July 11, 2013
Philippine broiler imports, corn costs and industry competitiveness
A good year, but with a looming need to bring costs under control before ASEAN's looming 2015 trade integration.
by Gemma C. DELMO
An eFeedLink Hot Topic
The Philippine broiler sector is having a steady, uneventful year that is reasonably prosperous but could be better. The real issue that of preparing for Southeast Asia economic integration, as imported chicken will fly across ASEAN borders tariff free in less than two years time.
Good year and a defective breed?Beset by high feed costs, in 2012, with incomes and per capita meat demand both rising, the industry still managed to have a good year. Broiler inventories still posted healthy growth of 4.62%, to 57.28 million birds from the previous year's 54.75 million. For 2013, the broiler population will rise 3.4% from last year's level of 57.28 million birds to 59.20 million head.
Moreover, with farmgate broiler prices going up by 15.5% to 21.5% or to PHP81/kg to PHP85/kg from the usual PHP70/kg a kilo, poultry farmers are mostly satisfied, except for trouble with a new, underperforming breed.
"We used to have the Cobb 500 but we shifted to MX for our male parent stock," says Greg San Diego of the United Broiler Raisers Association. "MX males die easily; that's why there are more infertile eggs. There is also a trade-off for broilers as it became sensitive to growth, especially during extreme weather conditions. The chickens have now become smaller."
The association is trying to figure out the problem and they have been consulting experts for immediate solutions. According to San Diego, "This situation should not deter us at a time when we are enjoying good prices. So we're trying to resolve this as soon as possible."
How much chicken is being smuggled in?
But what concerns San Diego and the rest of the industry more than short-term breed problems is the continuous flow of imports. From 2002 to 2012, broiler imports zoomed up by 679%, from 19,000 tonnes to 148,000 tonnes last year. Over the same time period, domestic broiler meat production only increased 26.4%, from 625,000 tonnes to 790,000 tonnes. That made imports go from 3% of the market in 2002 to 15.8% in 2012.
This year, with the domestic broiler sector upping its production and foreign broiler costs rising, imports are expected to level off (but not fall) at 150,000 tonnes. With imported broiler meat volume tripling from 2007 2012, a nominal 1.4% rise in imports is welcome, as for once, domestic production is rising faster, making imported chicken meat's share of the domestic market to nominally fall back to 15.5%.
Nevertheless, National Meat Inspection Service NMIS figures or dressed chicken inventory included only those from accredited cold-storage facilities, whereas San Diego believes that the total import volume should include the smuggled commodities. "That are just the figures that were recorded by the NMIS and I'm pretty sure that there are more. From our own estimates, leg quarter imports have already increased by 15%. Two processors in the PEZA (Philippine Economic Zone Authority) areas have already closed so imports should have lessened. I believe that there is a misdeclaration on leg quarters and other imports of chicken parts, I think these are being covered or misdeclared as meat and bone meal (MBM) shipments since it only a has 5% tariff."
And the declaring of high value meat imports for cheaper products that have lower import taxes has a long history, most recently with pork, where steak cuts and pork chops were being misdeclared as offal, which had a much lower import duty. The practise is apparently now spreading to poultry sector imports.
Despite government's claims that smuggling has somewhat eased, San Diego says it has been the opposite. "While we do not discount the efforts of the government, particularly the Bureau of Customs in stamping smuggling down, we strongly disagree to their statement that smuggling has been controlled since more areas have become entry points of these smuggled goods. In fact, we are giving them 'tips' as to where these shipments would possibly enter because we felt that they were either clueless or were made to believe that import numbers have gone down."
Multinationals enter broiler sector
Another growing concern for the industry is the establishment of Thai multinational Charoen Pokphand's (CP's) integrated facilities. CP is investing PHP2.32 billion (US$53.1 million) while being granted a 30% tax incentive by the Bureau of Investment (BOI) for seven years for its import of corn and other raw feed materials. Industry executives and other sectorial groups howled in protest as these tax exemptions were never given to local raisers.
According to one farmer, "Aside from the seven-year tax holiday, the Thai company would also enjoy tariff free importation of parent stock, machines, corn and other feed ingredients which will also affect corn and sugar cane farmers." He also added that the BOI appears to have put aside the best interest of domestic livestock producers, particularly the hog industry which is still suffering from the negative effect of the losses amounting to PHP28.5 billion (US$652.8 million) in the past three years.
Another broiler industry executive stated that CP has not really created local employment which foreign investors are expected to do, since the Thai firm is using advanced machinery in their operations which lessens their needs to hire Filipino employees. He added that contrary to CP's
What San Diego and other broiler sector stakeholders fear is that CP might just be using the Philippines as a platform to export Thailand raised broiler meat. Aside from urging the government to conduct a deep probe on the situation, San Diego and UBRA has already made filed a complaint against BOI's actions, which they say has not consulted them or the Department of Agriculture about the matter.
ASEAN 2015 and the corn question
Early this year, the Department of Agriculture said it is in the process of developing new overseas markets for Filipino raised poultry ahead of the Association of Southeast Asian Nations (ASEAN) economic integration into a single, mostly tariff free market in 2015. Under this ambit, commodity trade will be tariff-free where goods can flow in and out of ASEAN nations exempted of taxes.
Philippine business executives admit that the broiler sector stands unready for unfettered competition with its Southeast Asian neighbours. As such, the department of agriculture (DA) is already making preparatory moves to help poultry industry improve its competitiveness.
In addition, negotiations are said to be underway for the possible exports of poultry and other livestock products to Papua New Guinea, China, South Korea, Hong Kong and Indonesia. The bird-flu free status of the country might give Philippines an edge over top poultry exporters like Thailand which has experienced an avian influenza (AI) outbreak in 2012 but has been AI-free since the beginning of 2013.
But much of this can only happen if something can be done about the high fixed poultry rearing costs, arising from utilities such as electricity or natural gas expenses. San Diego notes that, "I think we now have the highest cost of electricity in Asia, surpassing Japan and we are the second or third in the world. We are trying to be competitive by putting up tunnel ventilations or state-of-the-art facilities which require much power. But if the electricity costs remain high as we use these facilities, then how on earth we can compete with countries that are subsidized by their own governments?"
Even San Diego is unfamiliar with this new trade structure and has sought the help with DA executives to acquaint them on this matter. "We are actually seeking a dialogue with the government and I think they should be more proactive about this because it's just a year and a half before this is implemented and we do not want to be caught off-guard."
But one part of the competitiveness puzzle could be resolved without cutting electrical costs, which admittedly are also a problem: The country's protectionist stance towards domestic corn only helps traders, as investigations repeatedly shown that the entire benefit of import duties on corn are pocketed by middlemen.
But while the resulting high corn prices leave middlemen rich and corn farmers poor, they also boost the cost of raising broilers in the Philippines to uncompetitive levels. The US Grains Council has repeatedly pointed out that Philippine livestock rearing costs were in line with those of other ASEAN countries before the government began getting protectionist with cheaper, imported corn.
Perhaps the first step on the road to preparing for ASEAN integration would be a cost-saving trade liberalisation of that most import of broiler raising inputs: feed.
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