November 5, 2014
Born of misfortune: Thailand's broiler sector goes on a lucky streak
With fortune finally going their way, lessons learned during their bird flu crisis are being used to their competitive advantage.
by Eric J. BROOKS
An eFeedLink Hot Topic
Ever since Saha Farms went broke and Thailand's trade with Europe and Japan was liberalized, the Thai broiler sectorhas enjoyed over 1.5 years of strong, but cautious prosperity. Their caution is because sooner or later, Saha Farms will resume full production and try to take back the market share it has lost over the last two years.
Despite such lingering concerns and slightly lower than expected output and exports, revenue and profitability have exceeded expectations. Betagro for example, saw revenues of US$1.24 billion in the first half of 2014, up US$311 million or 33.5% from the same period in 2013.Even in their domestic market, an economic slowdown induced by political troubles was counterbalanced by PEDv-inflated pork prices. The latter supported chicken consumption despite slower than expected employment and income growth.
The only drawbacks were a nasty New Castle disease outbreak, and the over-exporting of corn in early 2014, which kept domestic feed costs from falling. These two factors limited the production increase to a USDA estimated 4.7% or 1.57 million tonnes. This was slightly less than the 6.6% rise and 1.6 million tonne output originally projected.
Nevertheless, with exports growing at a respectable pace, domestic demand rising 2.9% in both 2014 and 2015, international poultry prices staying high, and feed costs falling sharply from their 2012 records, Thai broiler exporters could not have asked for more.
Export volumes rose an estimated 4.8% to 530,000 tonnes in 2014. Though the USDA projects a 5.7% increase in 2015 exports to 560,000 tonnes, there are supply and demand reasons to believe the real number may total closer to 600,000 tonnes.
Saha's re-entry makes export boost necessary
On the supply side, with feed prices continuing to fall, so too should production costs.
Furthermore, after being forced to cease operations in mid 2013, Saha Farms made a small restart in mid-2014. It was given a THB700 million baht (US $22 million) loan by Krung Thai Bank and immediately began processing about 200,000 broilers per day or 1.2 million broilers per week.
This allowed it to cover most fixed costs but still operate at a loss. However, by the fourth quarter, it had gained an additional THB 2 billion (US$63 million) in financing. The company needs to produce at least 1.8 million broilers weekly to break even and with the new financing, it will be able to grow up to 4 million birds a week.
Saha Farms' re-entry into the broiler sector will boost production far more quickly than the domestic market can handle. Hence, both Saha and its competitors will be forced to export. At this point, Saha Farms looks set to be a market factor in 2015.
New opportunities, export safety valve
Fortunately, despite Saha's resumption of production, new export windows are opening: CP and Cargill Meats (Thailand) have been approved by the Philippine government to commence exporting their meat to that country starting in February 2015. It will be the first time since 2004's bird flu induced ban that Thai broiler meat is being allowed into the Philippines, and also the first time it will export cooked chicken into that country.
After it allowed it back into the country for the first time in nine years, Japan's uptake of Thai chicken was stronger than expected. It reflected how alliances between Japanese importers and Thai integrators grew due during the years frozen chicken was banned.
To the north, although Russia has never been a large importer of Thai chicken, its ban on US and EU poultry has created opportunities that both Thailand will pursue, though it will be in competition against both Brazil and Argentina in this market. In the rest of the world, with both pork and beef in short supply, there is a tendency to substitute chicken in its place in most of Thailand's export markets.
All these new export opportunities cannot come fast enough: In the first half of 2014, 41% of broiler exports went to the Japan, with the EU accounting for another 38%. With over one-third of its production exported, it is dangerous for Thailand's broiler sector to be dependent on just two large, albeit, lucrative markets.
On one hand, with a third of output already exported and Saha re-entering the market, the industry has no choice but to put the coming production rise into a higher overseas market share. On the other hand, it does have the luck of one short-term safety valve: Should Saha re-enter the market and exports merely rise 30,000 tonnes as forecasted, any surplus can go into inventory rebuilding.
From 133,000 tonnes in 2011 and 104,000 tonnes in 2012, closing inventories are entering 2015 at 81,000 tonnes. Before Saha could fully ramp up production, the USDA projected they would fall to 72,000 by the end of 2015. With Saha's return, even if exports rise only marginally, inventories could instead rebound to around 100,000 tonnes. –At that level, inventories would total 6.0% of projected output.
This is comparable to 2013's 6.9% and 2014's 5.2% -and a far cry from the 2004, when bird flu made inventories equal 15.4% of output. Thus, troubling as it is for its competitors, Saha's re-entry into Thailand's broiler market need not be a death knell for their good fortune.
Getting efficient, competitive
But despite such medium term marketing challenges, the broiler sector did more than rely on luck to achieve its successes of the last eighteen months. Over the past five years, it has made substantial improvements to its chicken rearing and poultry processing capacity.Along with having fully implemented the compartmentalization of growing facilities, nearly all chicken housings now feature evaporative cooling systems. Especially in a tropical country like Thailand, this significantly reduces disease and mortality rates.
Alongside such infrastructure improvements, because over a third of broiler capacity has been opened only in the last five years, integrators were in a position to easily incorporate advancements in poultry genetics, farm management, and feed nutrition.
As a result, broiler finishing weights increased 14.6%, from approximately 2.0kg - 2.1kg in 2009 to 2.3kg - 2.4kg in 2014. Similarly, it takes 14.3% less time or six weeks to raise a broiler to maturity, as opposed to seven weeks in the late 2000s. Alongside the improvements in finishing weights and shorter growing times, feed conversion ratios have improved a significant 13%, from just under 2.0 five years ago to approximately 1.7 today.
Finally, while second tier exporters from Argentina to Turkey are threatening to 'catch up' to Thailand, it does have several aces up its sleeve. First, none of them have moved into branded, high value added frozen, ready-to-eat meals the way Thai chicken has.
In its latest GAIN report on Thailand's broiler sector, the USDA notes that, "Food service users and ready-to-eat food manufactures in Japan would like to distinguish their products with imported cooked chicken products." Similar customer recognition of chicken based frozen meals is also growing in markets ranging from Britain and Germany to Singapore.
Born in the dark, post 2004 bird flu days when Thailand could barely export a frozen chicken to the west or Japan, it helps put Thai chicken exports above mere commodity status. While new entrants can compete on price, Thailand's labour costs remain below those of both the west, and new export entrants like Argentina. But unlike them, it is already offering branded, high value chicken products one usually associates with western food giants.
In our era of falling feed input costs, Thailand's combination of western marketing savvy, fast rising broiler rearing productivity and developing country wage costs should put its high end processed chicken products in a very lucrative market niche.
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