September 13, 2018
Why Turkey's broiler sector needs hard currency exports
After a rosy 2017, a worsening economic crisis, new export bottlenecks coincide with cost inflation. With US dollar-earning exports growing slower than before, currency devaluation is inflating feed costs and foreign debt loads.
By Eric J. Brooks
An eFeedLink Hot Topic
After finally rebounding strongly from political circumstances beyond its control, Turkey's broiler sector is being challenged by strong macroeconomic headwinds. This is unfortunate because the industry entered 2017 on strong growth momentum, with production expanding a whopping 15.2%, to a record 2.188 million tonnes, from 1.90 million in the previous year. Even though the sector has been export-driven, domestic consumption still accounts for 83% of consumption and did much to stimulate growth.
2017's rosy economic conditions made it rise 13.4%, from 1.60 million tonnes in 2016 to 1.83 million tonnes last year. Consumption was also supported by high beef prices, which encouraged the cheaper substitution of poultry meat in its place. This rapid expansion in demand for chicken meat is far above its average 3.8% growth rate in the years since 2014, or even the 5.9% annual boom-time growth seen from 2009 through 2014.
Unfortunately no sooner did Turkish poultry's fortune's turn up that yet another crisis came its way. A political deadlock between Turkey and American resulted in the latter imposing sanctions and heavy tariffs. This has caused the Turkish lira to crash 40% in three months.
Turkey imports a third of its corn, 95% of its soybeans, a third of its soymeal, almost all grandparent broiler stock, a large proportion of day-old chicks and hatching eggs -all of which are priced in US dollars. With feed accounting for a USDA estimated 68% of production costs and day-old chicks another 14%, the lira's 50% devaluation from its level a year ago has caused a huge spike in input costs, particularly over the last four months when most of this devaluation occurred.
According to the USDA, another significant source of cost inflation is a slew of new regulations that have been recently imposed on the broiler sector. These include new prohibitions on the use of animal by-products in poultry feed, manure disposal and lower antibiotic use as part of Turkey's compliance with EU regulations.
The USDA also reports that "the sector has had a difficult time meeting the newer international welfare standards on cages while still being able to produce poultry efficiently. This implementation also increases the costs of production." With even the fossil fuel used to generate electricity for poultry housings rising in price, overall Turkish broiler production costs are being pushed up by approximately 25% within a very short time.
On one hand, with its currency falling by even more than this amount, the price competitiveness of Turkish chicken meat exports is not strongly affected. At home, is overall inflation running at close to 20%, with beef and lamb selling at historically high prices relative to chicken meat. Hence, both in its domestic and foreign markets, there is latitude for raising broiler prices.
On the other hand, ever since exports stopped growing strongly in 2014, the broiler sector has suffered from extremely thin profit margins. Mostly based on rapidly depreciating lira revenues and fast-rising US dollar expenses, and it would not take much to tip some integrators into bankruptcy.
Even before recent economic troubles began, in 2016 when exports fell steeply due to neighboring civil wars, two integrators, Aytac and Mudurnu, closed because of financial losses. Leading integrator Banvit was left in such poor financial shape that Brazil-based BRF SA used the situation to buy it out for TL915.1 million (US$258 million).
Within weeks of when Turkey's currency started its recent steep fall, leading integrator Keskinoğlu Poultry announced that it had applied for bankruptcy protection in order to continue its normal business activities. Despite enjoying a profitable 2017 with TL1.1 billion (US$173 million) in turnover and strong exports, Turkish analyst firm PA Intelligence reports that Keskinoğlu was being bankrupted by "ballooning" feed cost and loan interest payments, both of which were priced in US dollars.
With US dollar-based feed, breedstock, poultry supplement and fuel costs all rising steeply, no one knows exactly what level of non-operational US dollar debt other poultry integrators are carrying. Three things are, however, certain.
First, other companies may face ballooning expenses or a risk of default due to the Turkish lira's steep depreciation. Second, with price inflation racing ahead of incomes, Turkish consumers may at some point cut back their not only their red meat consumption but also how much poultry they eat. Chicken consumption increased by 1.4kg in 2017, to 24.0kg -it could easily fall again in response to a rapidly worsening economic climate.
Third, these circumstances are forcing Turkish broiler to adopt a conservative strategy and curtail their 2019 expansion plans: After rising 13.4% in 2017 (to 1.819 million tonnes) in 2017 and another 2.4% this year (to 1.863 million tonnes), the USDA is forecasting that domestic chicken meat consumption will fall back 2.1% (to 1.823 million tonnes) in 2019 -but this may be a low estimate: Turkey has had several economic crises over the past 30 years. In some cases, poultry meat consumption fell by over 11%.
The good news is that Turkey's poultry trade is again expanding at a healthy, though reduced rate. After three years of civil wars in Iraq (which absorbs over half of exports) and Syria, the temporary imposition of Iraqi trade barriers and bird flu outbreaks, all the above circumstances retreated in 2017. As a result, exports which had plunged 21.6% in from 378,000 tonnes in 2014 to 296,000 tonnes in 2016, rebounded strongly.
They rose sharply, up 24.7% to 369,000 tonnes in 2017 and had been expected to rise another 15.2%, to 425,000 tonnes this year, perhaps even to 450,000 tonnes in 2019 -but that was not to be.
On one hand, Iraq purchases over 50% of Turkish chicken meat exports and its demand has rebounded. After selling Iraq 200,000 tonnes in 2014, exports to that nation languished at slightly over 150,000 tonnes for the next two years, as Civil War, ISIS terrorism and a temporary import tariff took its toll.
2017 saw them rebound to a record 220,000 tonnes. -The only dim spot being that at US$331 million, export value to Iraq increased by 31% over 2016 but was still far below the US$410 million earned on a smaller export volume in 2014.
While non-Iraq chicken exports only provided US$30 million in revenues, there was a healthy expansion in two new frontier markets: Turkey had recently concluded poultry health and sanitation protocols with both Saudi Arabia and Japan. It will be able to use approved chicken processing plants to significantly boost exports to Saudi Arabia this year and both these nations in years to come.
The bad news is that in August, Iraq announced it would increase the import duty on Turkish broiler meat from 10% to 60%. Fortunately, with the Turkish lira's falling against the US dollar and Iraq's dinar rising against it, that will partly counteract the impact of the tariff. Even so, it is expected to result in flat or nominal export volume growth in a market that buys half of Turkey's chicken exports.
Moreover, Russia, another major customer, bought 40,000 tonnes or 11% of Turkey's 2017 broiler exports. It recently decertified 7 of the 16 Turkish poultry processing plants that had been approved for export, ruling that they did not comply with new Russian standards.
Due to such mitigating factors, 2018 exports will only rise 5.1% to a USDA projected 387,000 tonnes, instead of the previously estimated 425,000 tonnes. For 2019, there is much uncertainty but export growth is now expected to total 4.9%, to 406,000 tonnes.
The uncertainty is partly caused by Turkey's efforts at opening up new trade frontiers: It recently agreed upon a sanitary protocol for exporting chicken with Japan and hopes to sign a free trade agreement with it by the end of this year.
In anticipation of the Japanese market's opening, poultry producer has HasTavuk Company has already agreed to export to Japan's Sumitomo 500 tonnes of boneless poultry meat. A free trade agreement could see Turkey competing against Brazil and Thailand for a share of Japan's vast market for imported chicken.
It is also working towards getting official EU approval for its chicken feeding, antibiotic use, and animal welfare standards. Once Turkey's broiler farms get EU approval for these standards, nine processing plants have already been pre-approved for exporting to EU nations.
--And Turkey needs new export frontiers very badly: If one looks at Turkish broiler meat's growth metrics, annual output expansions has fallen from 9% in the 1998-2018 to 4% in the four years since 2014.
Over this same time, the rate of growth in domestic consumption also fell, from 7.0% in the 1998-2018 period to 3.8% since 2014 -but the industry's real weak point is its exports. After expanding at 34% to 44% average annual rates from 1998 through 2014, exports have risen at a paltry 1.4% annual rate in the last four years. Why does this matter so much?
Turkey is a developing country with a history of highly volatile currency fluctuations and sudden, steep devaluations. Importing a large proportion of both feed and non-feed inputs, over 60% of its broiler production costs are priced in US dollars!
So long as imported feed, breedstock, livestock supplement and electrical costs are offset by fast-rising chicken meat exports (which are also priced in US dollars), broiler farming income and balance sheets stay stable. -But since 2014, it has been in a situation where its US dollar expenses are rising sharply but its export volumes are growing slowly and its revenues even less so.
The recent 40% currency devaluation made the situation far worse. It greatly increases the risk of a major integrator default. This makes it difficult for broiler farms to get further financing or even expand at previous rapid rates.
Hence, in order to pay its bills, Turkey's broiler sector must do one of two things: Either become feed self-sufficient (which is physically impossible), boost its foreign exchange revenues from exports, or carefully control its production expansion. To do this, it badly needs to diversify its export base from Iraq and neighboring Middle Eastern nations, many of which have foreign exchange shortages of their own.
Until Japan, Saudi Arabia and the European Union become stable, mass market export frontiers for Turkish chicken meat, its integrators will have to hold back on production expansion -and this will limit their ability to compete against more self-sufficient second tier poultry exporters like Argentina.
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