FBA Issue 23: November / December 2008
Philippine layers: Time to get cracking
A growing population and rising incomes traditionally stimulated Philippine demand for protein-rich food such as eggs. Given that eggs are the most inexpensive form of protein, their consumption is high in countries with relatively low per capita incomes such as the Philippines. Now however, falling per capita incomes have coincided with the spectre of chronic oversupply. All this is made worse by stubborn retail prices that do not respond to market fundamentals.
Ironically, all this is happening after the industry enjoyed several prosperous years. According to the Livestock Development Council, the layer sector is producing at least 9 billion eggs annually and considered the third largest agribusiness in the country, earning an average of P20 billion ($423 million) yearly.
The industry's prosperous extended itself into the first quarter of 2008 before fizzling out. Data from the Bureau of Agricultural Statistics (BAS) showed that production increased by 4.89 percent as major egg chicken producing regions in Luzon have reported higher inventories of layers and better egg-laying efficiency ratios. As a result, BAS reports that gross layer revenues grew by 10.2 percent.
Overexpansion, sticky retail prices bloat supplies
Yet, despite such accomplishments, the layer and egg industry is still laden with numerous problems. These include worldwide feed price inflation, oversupply and high production costs. The National Federation of Egg Producers of the Philippines (NFEPP) says the industry is on the "survival mode" and is now experiencing one of its most turbulent periods in the last ten years.
Oversupply and low prices, which were felt as early as December 2007, are the biggest concerns of the industry right now, according to NFEPP president Gregorio San Diego. This is because imports of layer parent stock jumped from a mere 34,000 in the last three months of 2005 to 131,000 heads in the last quarter of 2006. San Diego adds that, "The industry is producing 30 percent more than the market needs because our imports of parent stocks have increased by 53.4 percent from 2006 to 2007."
While the market is responding to the growing surplus by hatching fewer eggs, the resulting glut cannot be avoided. Motivated by healthy profit margins earned over the last three years, San Diego lamented that importers decided to disproportionately increase their import volume of parent stocks. The end result of such over enthusiasm is that the industry now has more layers than it needs. "I have already told our members that we should start saving of what we earned in 2007 because there might be a supply glut in 2008. And my fears came true," he said.
For this reason, farm gate prices have fallen below production cost. San Diego says current prices are pegged at P3.00 to P3.10 as against output price of P3.50 per egg. However, retail prices are higher, ranging from P4.50 to more than P5.00 "There is definitely price distortion but the consumers will not know it because prices in the retail farm are higher," says San Diego.
This means that egg prices cannot be corrected since middlemen or traders are preserving their trade margins. Consequently, despite the oversupply, with retail prices staying stubbornly high, demand will not be stimulated, as would be the case if retail prices followed wholesale prices downwards. Therefore, even though prices fall, the excess is not readily absorbed through the otherwise expected rise in demand.
Currently, there are nearly 10 companies who are regularly importing parent stocks, which produce day-old chicks, which are bought by farmers to be raised as layers.
"They have imported parent stocks because it is well-priced at P26 ($0.55) per head in the last three years. Business has been good but imports have exceeded fifty percent last year, hence, its adverse impact has been very prominent this year," says San Diego.
To avert an oversupply crisis, farmers resort to "natural culling" or early slaughtering of older hens but San Diego says this did not also ease the situation. "The smaller farms cannot afford to extend more losses because they don't have a capital to re-invest unlike commercial farms where in such cases, they can afford to put up a 50,000-head farm right away."
To stop the small farmers' exodus, San Diego is urging the government to regulate imports by monitoring the entry of parent stocks. Over time, it is thought that this will balance supply with demand. He states that, "We are allowed to import as long as it doesn't come from bird flu countries but there is no agency that monitors the imports. It is really uncontrolled."
The Philippines is enlisted in numerous trade agreements including the ASEAN Free Trade Agreement (AFTA) where tariffs are set to end by 2010. Currently, imports are levied at a 40 percent tariff. This will be lowered between 0 to 5 percent once the free trade agreement is in place. "In this case, the industry will definitely not be protected so as early as now we're actually requesting for an extension of the minimum access volume (MAV) so the entry of imports will be monitored."
Egg marketing boards?
The MAV refers to the minimum volume for specific agricultural products that member nations of the World Trade Organization have agreed to allow entry in their territories at lower-than-regular tariff rates. Parent stocks and grand parent stocks of layers are imported from the US, Canada and Europe.
San Diego explains that in other countries such as Canada, egg industry groups have worked closely with the government. Their egg marketing boards go as far as regulating the entry of new players and restricting the expansion of existing production levels. For San Diego, an executive order from the president or congressional legislation regulating layer production and industry entry could avert an impending, disastrous state of permanent over supply, which may otherwise come within two years.
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