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September 2, 2015
Brazilian poultry's bird flu windfall
Exports jump to boom-time levels as it overtakes China to become the world's second largest poultry producer.
An eFeedLink Hot Topic
With both the American and Chinese broiler sectors hamstrung by bird flu, Brazil has taken advantage of the situation to overtake China as the world's second largest poultry producer. The years 2009 to 2014 saw Brazil, which once enjoyed 10% annual increases in exports, rise at a much slower 2% annual rate, while domestic consumption increased by 2.3% over this time.
Falling currency, low feed costs, steady consumption
At home, with Brazil's per capita poultry consumption near the saturation level of 46kg, the USDA forecasts its domestic consumption to keep rising at a 2.2% annual rate through 2015 and 2016. Here, recessionary economic conditions and high consumer indebtedness are being offset by relatively high beef prices. Hence, while overall meat consumption is slack, the resulting substitution of chicken in place of red meat allows broiler meat consumption to keep pace with population growth.
Overseas, with Brazil filling the supply vacuums created by America's bird flu export bans and Russia's embargo of US and EU meat products, chicken exports are on pace to increase by 5.1% in both this year and again in 2016. That will help boost Brazil's broiler production by 3.1% in both 2015 and 2016, to 13.08 million tonnes and 13.48 million tonnes respectively.
This pulls Brazilian output ahead of China, which is expected to produce no more than 12.9 million tonnes annually both this year and next. It means that Brazil, which was already the world's top chicken exporter, has overtaken China to become the world's second largest broiler meat producer.
But there is more to Brazilian chicken meat's rising trade status than the fact that both America and China have had their poultry sectors dented by bird flu. Since 2013, the Brazilian real has fallen 45% against the US dollar and had a 30% devaluation this year alone. That has made Brazil's broiler meat exports significantly cheaper and their unit revenues considerably higher.
With an expected 11% drop in feed costs being partly offset by rising costs for labour, transport and electricity, surging export volumes and revenues are coinciding with a USDA estimated 3% to 4% fall in production costs. This allows significantly wider profit margins to coincide with rising export demand.
New export frontiers…
Moreover, new exporting opportunities are also on the horizon. None more so than China. From less than 20,000 tonnes seven years ago (when America dominated Chinese chicken imports), Brazil's chicken meat exports to China went to 106,229 tonnes in 2014, and a USDA estimated 146,628 tonnes for 2015.
After rising 38% this year, export momentum is expected to carry over into 2016, when they are expected to rise another 36% and total at least 200,000 tonnes. That will make China overtake Japan's 190,000 tonnes to become Brazilian chicken's second largest customer after Saudi Arabia, which bought 319,000 tonnes in 2014 and is expected to import nearly 360,000 tonnes this year.
All this is due to more than America's bird flu epidemic, which got US chicken meat banned from China earlier this year. China has started approving many Brazilian poultry processing plants for export. As of early September, 30 Brazilian chicken processing plants were approved for export; and this number is expected to reach 40 by the end of this year.
Elsewhere, recently signed trade pacts with South Korea and South Africa have had a simulative impact. Exports to South Korea, for example, doubled from 2014's 29,760 to this year' USDA estimated 58,854 tonnes, while those to South Africa jumped 50%, from 74,600 tonnes in 2014 to 111,900 tonnes this year. While those to South Korea increased more due to its bird flu driven banning of US chicken, the real's devaluation is giving Brazilian chicken a long-term advantage in both these new, frontier markets.
Going forward, Brazil recently negotiated poultry meat trade liberalization agreements with Malaysia, Myanmar and Pakistan. Collectively, these three countries are thought to have potential to buy 50,000 tonnes of broiler meat in 2016.
The bird flu epidemic also created a Brazilian export opportunity right in America's own NAFTA backyard: Thanks to bird flu, Brazilian chicken was exported to Mexico for the first time. Brazilian exporters are being overly optimistic in their belief that up to 200,000 tonnes could be exported to Mexico. Nevertheless, the impending approval of new processing plants for export to Mexico means that Brazilian chicken may get a permanent foothold in the US's largest trading partner.
…Outweigh market losses
There are of course, also world market disappointments. Russia, which looked to become a lucrative market for hundreds of thousands of tonnes in exports, never materialised. Instead, Russia practiced import substitution, boosting its own production up 400,000 tonnes in two years when its consumption only rose 180,000 tonnes.
As a result, Russia's chicken import volume shrank from 530,000 tonnes two years ago to 220,000 tonnes today. With Chinese poultry competing against it, Brazil's chicken exports to Russia are only rising from 23,000 tonnes in 2014 to 38,000 tonnes this year, not the 100,000 tonnes or more once hoped for.
On one hand, the oil price crash has not impacted exports to the wealthier oil rich countries like Saudi Arabia, the UAE, Kuwait, or Qatar. They are increasing their imports of Brazilian chicken by a collective 9.9% or 50,000 tonnes, from 525,000 to 577,000 tonnes.
On the other hand, poorer oil exporting countries have cut their imports of Brazilian chicken and none more so than Venezuela, which slashed its import volume of Brazilian chicken by 63% or a whopping 73,000 tonnes, from 116,861 tonnes in 2014 to just 43,123 tonnes this year. Even when Venezuela recovers, it will face competition from Argentina, which is becoming the preferred chicken export supplier within South America itself.
Elsewhere, from over 220,000 tonnes five years ago, the re-introduction of lower cost, frozen Thai chicken into the EU has made its exports to the continent fall by more than 50%. This year will be no different, with broiler meat exports to the EU falling from 114,725 tonnes in 2014 to 105,978 tonnes this year.
Similarly, exports to Iraq fell by 39%, from 28,266 tonnes in 2014 to 17,345 tonnes and those to Iran fell by over 90% from 5,218 tonnes to just 423 tonnes. While the oil price crash played a role, neighbouring Turkey played an important role in this Persian Gulf market retreat. The latter's broiler exports jumped from 110,000 in 370,000 this year, pushing Brazilian chicken out of Iranian and Iraqi supermarkets in the process.
Despite such challenges, America's bird flu epidemic and the real's depreciation against the US dollar had made Brazilian beef more competitive everywhere except the EU, where Thai chicken has also been cheapened by the baht's falling value versus major currencies.
Going forward, this export windfall will eventually taper off and growth will fall to the slower level of a large but mature poultry producer. Brazil's currency has nowhere to go but up, which means that in years to come, its currency exchange rate will do the industry no favours.
Brazilian labour costs, which are already rising faster than those of number two exporter America, will see their cost increase multiplied by any future increases in the Brazilian real's value. That could make it difficult for Brazil to export cooked or processed chicken, as Thailand has a large cost and technological advantages in this particular market niche.
It means that when America's poultry sector shakes off bird flu, Brazil will face the same strong competitive pressures it did from 2009 to 2014. The end of this decade will see exports revert to their 2.0% to 3.0% longrun average. For now however, Brazil's maturing broiler sector will enjoy two years of export growth that feel more like the turn of the century, before the industry matured.

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