July 31, 2013
A peculiar northern chicken: Canada's pricey, protected but stable poultry market
Government protected and more expensive than pork, Canada's broiler sector resembles the US market on the demand side but has completely different supply side characteristics.
by Eric J. BROOKS
An eFeedLink Hot Topic
Unlike its far larger American neighbor, Canada's poultry sector is a regulated, protected from import competition, and domestically oriented to serving its maturing market. This is also very different from Canada's red meat producers, who export over half their output.Rather than compete freely, Canadian poultry output is managed and delegated by government-linked supply management boards. Bimonthly production volumes are set on the basis of the previous eight week production cycle and how much of it was absorbed by the market. Chicken production quotas are allocated to each of Canada's ten provinces, who then subdivide their individual chicken production quotas among their region's respective broiler farms.
Such market regulation leads to a high cost base, and its survival depends on trade protectionism. Under rules it successfully wrote into its NAFTA agreement with the United States and Mexico, Canada only allows imports equal to 7.5% of the previous year's output, which has stayed between 1.01 and 1.06 million tonnes since 2007.
Protected from risk, more expensive than pork
The need for protectionism arises from two factors. First, the neighbouring United States has somewhat lower feed costs, especially for soy, which chickens eat a relatively high proportion of. With the domestic US market being ten times larger and with 20% of US production output exported, Canada never produces more than 7% of America's broiler meat production.
Nevertheless, despite America's slightly lower feed costs and larger market, the main impediment to Canadian poultry is political: The above mentioned supply quota system protects countless small scale farmers, who supply chickens to large processors. Under the supply management system, poultry farmers are guaranteed minimum prices while chicken processors face the market fluctuations of changing supply and demand conditions.Aside from transferring market risk from farmers to meat processors, the supply management system is designed to keep small, mostly family operated chicken farms from having their output taken over by larger, vertically consolidated integrators, which is what has happened everywhere from America to Thailand. That is politically popular but keeps Canadian poultry unit costs significantly higher than those of their American neighbours.
In fact, it makes Canada one of the few countries on earth where chicken costs more than pork. This is because swine and cattle production is not regulated by government control. It also the reason why Canadians despite similar income levels, cultural preferences and consumption habits, Canadians eat about 8kg per capita less chicken than Americans, but slightly more pork than they do.
Such expensive chicken requires protection, especially with the US's lower cost, integrated facilities a three hour drive across their common border. Hence, NAFTA rules commit Canada to allowing import volumes equaling up to 7.5% of the previous year's production or approximately 75,000 to 80,000 tonnes.
But along with the supply-side differences, there are also demand-side similarities. Much like its US cousin, Canada's poultry sector grew at a rapid rate of 5.8% in the 1990s, as per capita consumption increased from 17kg in 1981 to 22.5kg in 1991 and 30kg in 2001, topping out at a lower level due to Canadian chicken's much higher retail price.
Like their American cousins, Canadians prefer to consume white meat portions. Breasts hold pride of place at family dinners and barbecues, as they do throughout all of North America, and the Canadians are as likely to enjoy wings with beer while watching hockey as Americans are when watching baseball. Moreover, the entry of dark meat eating immigrants from Asia and Africa is now boosting consumption of bonier, dark meat parts in Canada just as Hispanic immigration did so earlier in the US.
Driven by partly by chicken's lower price, partly by the mythical belief that it is 'healthier' than red meat, Canada's chicken production was further boosted by an influx of over 250,000 immigrants annually to a country with a population of 25 million at the time.
However, in the years since 2000, immigration, particularly from Asian countries with high poultry consumption rates continues to fuel demand growth. But Canada's birth rate is barely at replacement level whereas the US birth rate -and population growth– is much higher.
Hence, with Canada's per capita poultry consumption staying constant around 30kg to 31kg, the years since 2000 has seen the poultry sector's output growth decelerate to a 1.6% annual rate. Last year was no different, with output rising by 1.7% in 2012, and projected to increase 1.4% in 2013.
Balanced trade
Ironically, despite requiring protection from imports, Canada's poultry trade remains balanced, on the nominal net exporter side: It has an Import Re-export (IREP) agreement with the United States, under which it usually imports approximately 75,000 to 80,000 tonnes of raw chicken for processing and re-export to the US. In all, 11% to 14% of Canada's chicken supply is imported but less than 8% of this is foreign chicken meat consumed in Canada.
The rest is imported chicken that is merely processed and re-exported. Approximately 41% of these exports go to the United States, 14% to Taiwan, 13% the Philippines, 8% to Hong Kong
With the US next door, 90% of imports, whether for domestic consumption or re-exporting, come from the United States. Although a small quantity of chicken is also imported from Thailand or Brazil, the difficulty of re-exporting their chicken to America drives the Canadian preference for US broiler meat imports as much as its geographic proximity.
Generally, re-exports under the IREP go to the US and consist of white meat parts preferred by American consumers while non-IREP exports going to other countries consist of bonier, darker parts that tend to shunned by mainstream Canadian and US consumers. Aside from providing them with lower cost chicken meat, the IREP program also keeps Canada's chicken competitive by increasing the scale economies of its larger processing plants.
The cost of competitiveness
Taken together, all this makes for a high cost but stable market. Should Canada ever stop protecting its broiler sector and allow unregulated, market driven production, it would be disastrous for thousands of small, individual broiler farmers.
They would be driven out of business, but after a massive import surge, Canada's broiler industry would hardly die out. Large integrators would either take over the output of the smaller producers, or re-hire some of them under a contract farming model whereby they use their market power to supply inputs more cheaply than before. Given that the Canadian market is only large enough to support one or two poultry integrators on the scale of America's Tyson Foods or Thailand's CP, the question of whether the surviving integrators would be Canadian or (most likely) American would loom large in the country's public consciousness.
But once such the country had gone through the painful restructuring, Canada's chicken sector, like its beef and poultry producers, could become export-driven entities that could stand up to imports from America, Brazil or any other poultry producer. For now however, the political will for such a bold step just isn't there.
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