September 6, 2017
Argentina's broiler sector: Stagnant and boxed in by circumstances
Recession, Brazil's currency, Venezuela's default, oil prices have undermined once vibrant growth. Lower taxes, value-added processing point the way, but luck is also needed.
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By Eric J. BROOKS
Despite being blessed with cheap, ample feed supplies, high productivity and highly sanitary poultry processing facilities, Argentine poultry's once promising broiler sector has fallen on hard times.
Exports crash, domestic consumption stagnates
At 158,000 tonnes, chicken meat exports were down a USDA estimated 15.5% or 29,000 tonnes down from 2016 levels. It is the lowest broiler meat export volume since 2007 and a whopping 53% below the 334,000-tonne record set in 2013.
The proportion of chicken meat exported has plunged from 16.2% that year to 7.7% in 2016. This year's 17% increase in export volumes still leaves them at 187,000 tonnes. Nor will recovery come quickly: The 200,000 tonnes of projected 2018 broiler meat exports are 41% below what was exported in 2013.
–Prior to 2016, the last time Argentina exported less than 200,000 tonnes of broiler meat two years in a row was before 2010. Even as recently as three years ago, the USDA had forecast 400,000 tonnes of Argentine broiler exports by 2015 and close to half a million tonnes by this time. It is quite a stunning reversal from a near 10-fold, 756% increase in export volumes that had occurred in the ten years leading up to 2013.
The situation is made worse by Argentina's domestic market: After nearly tripling from 0.62 million tonnes in 2002 to 1.73 million tonnes in 2012, consumption has stagnated, staying range-bound near 1.9 million tonnes every year since 2015 –and will do so again in 2018. This year's export performance was as disappointing as anticipated but a worsening macro economic climate slashed consumer purchasing power.
A nasty recession means that instead of a nominal 1.6% increase in 2017's domestic chicken consumption to 1.94 million tonnes, the USDA was forced to revise its projected consumption to 1.91 million tonnes –unchanged from last year.
With the economic climate worsening, this year's domestic demand driven growth estimate of 3.4% (to 2.125 million tonnes) was scaled back to 1.5% (2.086 million tonnes), with only 1.2% growth (to 2.11 million tonnes) projected for 2018.
To be fair, all these factors are due to macroeconomics: The industry has not done anything to bring on these misfortunes.
To make matters worse, after jumping from 22kg in 2000 to 43kg in 2016, it is difficult for domestic consumption to outrace slow population growth, especially when Argentines are already eating as much chicken per capita as Americans. With Argentina's population expanding by less than 1% annually, the USDA states that "domestic consumption of broiler meat has practically reached its ceiling and there is little room for further expansion."
This lethal combination of flat consumption and nose-diving exports halted the industry's post-2013 growth and will keep it stagnant in 2018.
Venezuela, oil price, exchange rates undermine competitiveness
Alongside very little scope for domestic market expansion, Argentina has even less control over its poultry's international trade circumstances. In the early 2010s when exports were at record levels, Venezuela bought 40% of all Argentine broiler exports.
Partly due to an oil-price crash, partly due to Venezuela's politically driven debt default, Argentine poultry's biggest export market turned against it. Venezuela went from buying 125,000 tonnes of Argentina's record 334,000 tonnes of chicken exports in 2013 to just 12,000 tonnes in 2015 and nothing today.
There is however, more than the massive of loss of Venezuela's debt defaulted market behind Argentine chicken's failing trade performance. Before the middle of this decade, Brazil exported most of its chicken to Asia and the Middle East. Argentine chicken was the choice of Latin American buyers in nations such as Chile, Venezuela, Peru and Bolivia. This is no longer the case.
Since 2014, Brazil's real has fallen by more than 50% against the Argentine peso. With the real falling by half in five years, cheaper Brazilian chicken meat is being substituted in place of higher quality but more expensive Argentine chicken throughout South America's Mercosur trade bloc and Mercosur-associated countries including Chile, Paraguay, Bolivia and Peru.
Chile for example, was once second only to Venezuela as a buyer of Argentine broiler meat, buying as much as 25,000 tonnes five years ago. First, a free trade agreement between America and Chile reduced the volume of Argentine broiler meat exported to Chile to 22,000 tonnes by 2014 and 18,900 tonnes by 2015.
Thereafter, the US dollar rose against Argentina's peso, partly restoring the latter's competitiveness in Chile's import market. Unfortunately, a 50%+ fall in Brazil's real (relative to Argentina's peso) undercut the cost of Argentine chicken meat, resulting in a continued loss of South American market share.
For example, in 2013, Chile imported 73,000 tonnes of chicken, with 25,000 tonnes of this total coming from Argentina. By 2015, exports fell to 18,900 tonnes. This year, Chile will import 150,000 tonnes of chicken meat, but only 15,000 tonnes will be imported from Argentina –Brazil edged Chile out of this and other national markets throughout Latin America. –Had Argentina kept its 2013 share of Chile's imported chicken market, it would be exporting 50,000 tonnes of broiler meat to Chile in 2017, not 15,000 tonnes.
Oil price crash hampers export diversification
Argentina of course, hasn't stood by blindly while all this was happening. It aggressively boosted its chicken exports to Russia after 2014, when the latter substituted Latin American meat in place of US and European imports. In late 2014, Global Meat News announced that Argentina would import 30,000 tonnes of Argentine chicken meat in 2015, with the implication that the amount could rise to 50,000 tonnes or more by this time.
Instead, a crashing oil price plunged Russia's economy into crisis. By the time its economy recovered, Russia had achieved near self-sufficiency in chicken meat. As a result, based on H1 2017 USDA figures, this year's chicken meat exports to Russia look unlikely to exceed 20,000 tonnes –and Brazil is selling Russia much more low-cost chicken meat than Argentina is.
A similar story played out in the Middle East, where a combination of falling oil prices and cheap Brazilian chicken resulted in a disappointing demand for Argentine chicken.
Thailand's advantage = Stable export markets + growing consumption + low labor costs + value added
As a result, rather than catching up to Thailand in chicken exports (as seemed likely five years ago), Argentina finds its chicken shipment volumes sinking below 200,000 tonnes –while those of Thailand rise to 730,000 tonnes. But here too, trade's fickle fortunes and domestic demand play their roles.
The post-2012 rise in Thailand's broiler exports was due to the liberalization of its chicken trade with the EU and Japan –two markets that were not impacted by the oil price crash. Moreover, with per capita chicken meat consumption still at 16kg, Thailand's fast-growing economy has decades of rapid, pent-up consumption growth.
Moreover, Thailand's substantially lower labor costs enable it to export a much higher proportion of its chicken in value-added processed forms, such as ready-to-eat meals. The USDA states that only 2% of its chicken have the value-added processing that defines 40% of Thailand's export profile.
According to USDA statistics, only 2% of Argentine chicken exports undergo value-added processing. While it reports, "significant interest" in developing "value added operations", it states that most of this are in Halal-compliant chicken processing. While this can open up Middle Eastern and Muslim majority markets, it does not increase revenues per unit exported the way additional processing would. The revenue Thailand gains from value-added processing offsets Argentina's savings from lower feed costs.
Hence, a feed-based competitive advantage and USDA cited factors such as "production efficiency, excellent product quality, product standardization and tight traceability" are offset by a combination of collapsing export markets, currency realignments beyond the country's control and a lack of value-added processing. All these played a role in Argentine broiler meat shipments being revised downward "due to greater competition from major exporters."
Burdened by overcapacity, high labour costs and Brazil's currency-driven competitive advantage, Argentine chicken exporters are in no mood to expand capacity, let alone boldly attempt Thai- style, export-driven value-added processing.
Remove export-unfriendly value added taxes?
Over the medium term, the industry is aggressively lobbying president Mauricio Macri's pro free market government to abolish value-added taxes equal to 21% of production costs. If abolished, the removal of such export-unfriendly taxes could profoundly boost Argentine chicken's competitive standing, especially if it coincides with the Brazilian real rising back to its normal market value. Such tax reform can only be contemplated in late 2017 or early 2018, after October's mid-term elections are over.
Despite these difficulties, the industry can count some successes: Whereas it was dangerously dependent on Venezuela and Argentina for nearly half its export shipments five years ago, this is no longer the case. It a succession of minor but cumulative trade liberalization measures to diversify its export profile.
Destinations such as China and Hong Kong (a combined 30% share), South Africa (14%), Russia (10%) and the United Arab Emirates (6%) now account for 60% of exports. With no one country absorbing 40% of Argentine poultry meat exports, a disaster like Venezuela's default can never hurt the industry in this way again.
A return to the higher profitability of yesteryear could encourage a new wave of investment not just in capacity, but in value-added processing. The latter's economic viability could be greatly augmented if the government wisely removes export-unfriendly value added taxes. Even so, factors such as currency exchange rates and the oil price revenues of prospective importers largely remain outside the industry's control. Thus, the need for a windfall of good luck to counterbalance five years of misfortune.
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