July 26, 2018
Thai broilers fly higher on wings, breasts and Brazilian woes
Early year losses in Thailand are offset by rising profitability abroad. China's liberalizing of broiler imports, Brazilian trade misfortunes, barley imports offer an escape from high production costs and bloated domestic supplies.
By Eric J. Brooks
An eFeedLink Hot Topic
It is turning into another good year for Thailand's export-driven broiler sector, the fifth good one in a row. The industry has seen more profitable years but expanding exports and high overseas returns are offsetting domestic woes.
Powered by an average 14.3% increase in exports, the years 2013 through 2017 inclusive saw Thailand's broiler meat output rise by 6% annually, from 1.5 million tonnes to 1.9 million tonnes. 2017 exports came in above expectations, rising to 6.7% to 770,000 tonnes, instead of less than 5% as initially forecasted.
The good times have sufficient momentum to continue into this year too: From January to April, exports totaled a record 270,000 tonnes and 15% more than the 235,000 tonnes exported in the same period of 2017. Buoyed by prosperity-driven domestic consumption increases in and strong export growth, the USDA projected output to rise by 4.7% to 1.99 million tonnes and exports to 5.2%, to 810,000 tonnes. By mid-year, these estimates looked too conservative, as April brought news that brightened Thailand's export prospects (at Brazil's expense) for the remainder of this year.
Since 2013 when the EU and Japan both removed their bans on Thai frozen chicken, exports have increased at a 14.3% annual rate. Moreover, this year will see an unexpected extension of 10%+ export growth: In April Brazil had 20 processing banned from exporting frozen chicken to the EU while China and Saudi Arabia put up trade barriers against Brazilian chicken.
While increasingly successful abroad, domestic operations are a victim of their own success in dealing with medium-term problems: Thailand's banning of bird flu-afflicted US breed stock in December 2014 held back production for a few years. Ironically, Thailand successfully substituted breeder stock from France, Netherlands, Denmark, and New Zealand in place of US imports to the point of creating an oversupply situation.
Bloated broiler inventories deflated Q1 broiler prices, falling 12% lower than in the final quarter of Q3 2017. Coinciding with a sharp rise in feed costs, they put many broiler farming operations into a net loss position early in the year. Even amid stagnant world corn prices, Thai corn prices were 23.5% higher in Q1 2018 than in the same period of 2017.
By May, local feed corn sold for 33% more than it did in the same month of 2017. This had a bad impact on Thai integrators, with CP's broiler operations suffering two-quarters of net losses. CP's broiler sector competitors suffered a similar squeeze on their profit margins.
This is because Thai corn farmers are protected from foreign feed grain but are unable to keep up with feed demand. From 2010 through 2017 broiler meat output rose 48%, from 1.28 million to 1.90 million tonnes. Corn harvests however, only increased 21%, from 4.2 million to 5.1 million tonnes over this time.
The resulting high domestic corn prices put a predictable pressure on poultry farming margins. Even after prices moderated in mid-June, Pornsilp Patcharinrattanakul, president of the Thai Animal Feed Producers Association stated domestic corn cost TBH10,000/tonne or US$302/tonne, compared to under THB8,000/tonne in early 2017.
This translated into a Q2 2018 corn cost of US$7.67/bushel at a time when CBOT corn futures are selling near US$3.70/bushel. There are however three factors that will improve the returns of Thai broiler integrators in the second half of this year.
First, aware of high domestic corn prices were tipping producers into a net loss position, March saw Thailand's ministry of agriculture allow integrators to import one tonne of wheat or barley for every tonne of corn they purchase from domestic farmers.
Even so, industry sources imply that many integrators are purchasing foreign corn without buying local supplies: The Thai Feed Association (TFA) reports that since early April, 13 out of 50 mill operators in its association have stopped buying local corn. Led by CP, several integrators have imported wheat or barley for as low as THB7,000/tonne (US$4.57/bushel). In all, the TFA estimates 120,000 tonnes of barley and a similar quantity of feed wheat have been imported over the past two months.
This is bad news for Thai corn farms and may eventually prompt government action against integrators. For now, however, it is helping to deflate their bloated broiler feed costs.
Second, April's EU ban on chicken parts from 20 Brazilian processing plants increased not just European demand for Thai chicken breasts but also their international price. That helps offset losses incurred in Thailand's domestic market earlier this year.
Third, the EU's April move coincides with Brazil being accused of dumping chicken into China. Beijing instituted new rules that make it more difficult for Chinese buyers to import Brazilian chicken. --And by coincidence, China recently approved the duty-free importing of chicken parts such as wings legs, internal organs and necks from 19 Thai processing plants.
The first mass shipment of Thai chicken arrived in China in April. With restrictions on Brazilian imports creating a market vacuum, a lot more Thai chicken should be exported to China in months to come.
Over the short-term, this should have a positive, material impact on domestic Thai broiler prices and chicken exporting volumes from the third quarter of this year onwards. A DBS Bank report states: "This should benefit Thai livestock operators and support the domestic broiler price." Rabobank's Q3 Poultry Quarterly concurs that "The recent opening of the Chinese market could offer the Thai industry a chance to receive better prices for chicken wings, as China has a clear preference for these products."
Collectively, the EU's move against Brazil relieves Thailand of an oversupplied value-added part (breasts) while boosting their international selling price. China trade liberalization similarly enhances the profitability of chicken wings, organ meats and by-products that might otherwise be discarded or recycled into lower value pet food.
Over the longer term, amid floundering Chinese broiler production and new import restrictions against Brazil (which exported 600,000 tonnes of chicken to China in 2017), China is giving Thailand an opportunity to export several hundred thousand tonnes of chicken at Brazil's expense.
Fifth, if all that wasn't enough, new restrictions by Saudi Arabia and the United Arab Emirates on Brazilian chicken that doesn't conform to accepted Halal slaughter techniques reduced its H1 2018 shipments to these countries by 30%. Under the circumstances, Thailand will compete against Turkey, Chile, China or Argentina pick up some of Brazil's lost Middle Eastern market share.
With policymakers in Europe, China and the Middle East all placing restrictions on Brazilian chicken, Rabobank concluded that "Thailand is well positioned to benefit from the displacement of Brazil from some international markets."
Sixth; exports to Northeast and Southeast Asia have exceeded expectations. Demand for cooked Thai chicken is growing faster than en expected in Japan. Last year's Brazillian tainted meat scandal made Japanese suppliers temporarily suspend imports from Brazil -just as shipments from new Thai-Japanese joint ventures became available.
With a new trade agreement allowing its frozen chicken into South Korea for the first time, Thailand found its broiler meat exports to that country also growing strongly. Within Southeast Asia, its frozen chicken exports to Laos have also been higher than anticipated.
Collectively, the above actions creating scope for an additional 5,000 to 15,000 tonnes of shipments each to Europe, China, Southeast Asia and the Middle East respectively.
Consequently, the USDA's current 810,000-tonne export forecast for Thailand looks increasingly unrealistic. Barring an unforeseen setback, Thailand is on course to ship at least 10.4% more chicken by volume than it did in 2017. This year's exports can be expected total somewhere between 850,000 and 900,000 tonnes.
While it will happily use the high export demand to reduce inventories, we can expect output to marginally transcend the USDA's forecast and touch 2 million tonnes for the first time.
Domestic broiler prices expected to recover in H2 2018. With integrators substituting cheaper wheat and barley in place of domestic corn, a concurrent decline in feed costs will lead to wider domestic profit margins.At the same time, Chinese and European buyers are pushing both demand for Thai chicken parts and their selling prices. All this implies that after lackluster returns in Q1 and Q2, Thailand's broiler sector should enjoy greater profitability in the second half of this year
One thing is for sure: While Thailand cannot compare to America or Brazil, it is now straddling a middle ground between tier 1 and tier 2 world chicken market suppliers. Its exports are 50% to 100% higher than those of Poland, Turkey, China or Argentina.
Having avoided a serious bird flu epidemic for nearly 15 years, its share of world broiler meat exports have risen from less than 3% in 2004 to approximately 8% this year. As a share of its production, exports went from 37% in 2003 to 22% in the dark years after bird flu struck and have now rebounded to over 42%.
Thailand is also on track to becoming the third country to export a million tonnes of chicken or more by 2020 -and it will do so while exporting a far higher proportion of value-added cooked or processed chicken than either America or Brazil. That's quite an accomplishment for a feed scarce country whose chicken was banned from large world markets less than ten years ago.
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