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December 10, 2010
Brazilian Poultry: Big and strong but not growing quickly anymore


A rising currency, export road blocks, bird flu and a failure to invest overseas early means that Brazil will lose out to its Thai and American rivals but still maintain a dominant market position.

An eFeedLink Hot Topic
by Eric J. BROOKS

If any country has been international poultry's superstar of the last decade, it is Brazil and its momentum has carried through into 2010.


According to the USDA, it has been a banner year for Brazilian poultry, with exports up 4% by volume and 17% by value. With export revenues rising several times faster than export volumes, rising international poultry prices kept revenues per unit nicely ahead of rising feed costs. Next year however, will see a secular, long-term tapering off of growth.


Why growth will be slower in the future

It will still however, remain at respectable levels. For 2011, the USDA expects both production and export volumes to rise by 3% respectively. And 3% growth is good for a mature industry, not a developing industry. That's because Brazil's poultry sector is getting all grown up. At 11.8 million tonnes, 2011's expected output will set a new record, exceeding 2010's 11.46 million tonnes. Percentage-wise however, this is mediocre compared to the heady years of the 1990s and 2000s.

Exports are being impacted by the real's rising value and will expand a slower 3% - the latter being something Brazil must soon get used to. According to a fourth quarter USDA GAIN report, expansion in traditional middle eastern markets will be outraced by higher exports to Asia, particularly north Asia.


One particularly promising destination for Brazilian poultry will be China, which recently slapped tariffs on US poultry exports. South Africa and Indonesia are also seen as emerging export frontiers, though as we shall see, over the longer term, it faces intense competition from Thailand in the latter.


With respect to established, rich countries, Brazil appears destined to lose some market share to Thai poultry in the EU and Japan. Several issues are behind this prediction.


In Europe, the EU recently imposed new standards for using additives and AGPs. This is blocking poultry from a rising proportion of Brazilian farms from entering the European Union. Brazil's poultry industry, whatever its merits, does not have the experience or tradition of complying with international regulatory standards that Thailand does.


At the same time, Thailand has conquered its bird flu scourge and successfully has raised AGP and additive-free birds for export (as cooked poultry) for many years. Long dependent on cooked meat exports, it looks as if Thai poultry is will regain (at Brazil's expense) some of the frozen chicken market share it lost during its bird flu crisis.


Exports blocked, no bird flu, Thais set up local production

Moreover, large, promising markets that should be Brazilian export frontiers have plans of their own: While India recently agreed with Brazil on poultry import sanitation and hygiene standards, New Delhi policymakers are clearly keen on maintaining poultry self-sufficiency and intend to keep poultry import tariffs prohibitively high.


By comparison, Thai integrators have turned a curse into a blessing. Having been blocked from exporting frozen chicken for years, they opted to set feed-to-chicken operations overseas. Consequently, even if India keeps its tariffs high, Thai integrators have a huge head start in setting up integrated poultry rearing operations inside India itself.


Similarly, with Russian poultry production rising rapidly, imports have been falling by more than 20% annually. This makes it redundant to try and edge out US poultry in a large but increasingly self-sufficient Russian market. Here too should Brazilian integrators invest in domestic Russian production and squeeze out the local competition, they will run into state-of-the-art Thai integrators. With Thailand already enjoying first  - mover advantage, it would be very difficult for Brazil to play catch up, particularly in Russia where the domestic poultry sector is raising productivity up to world standards.


This means that setting up local production in these large markets is not as easy an option for Brazil as it was for Thailand. When combined with timely overseas Thai investment, India and Russia's import substitution policies are blocking Brazilian beef from a total of 1.5 billion people.


Nor are Brazilian poultry's established markets entirely safe. With Japan having recently approved the resumption of Thai frozen chicken imports, the situation is problematic. Thailand used to own Japan's poultry import market. With bird flu, Brazil easily took a dominant market share away from the Thais. Without bird flu, their production costs are similar but Brazil cannot compete with Thailand on regional Asian transport costs.


However, in addition to these factors, other forces are at work slowing down the pace of Brazilian poultry export growth.

Past advantages disappear but……

Most importantly, the forces which powered Brazilian poultry's ascension are now going into reverse. In the 1990s, fuelled by an undervalued currency and low production costs, Brazilian poultry output grew rapidly, overtaking US poultry's world leading market position within a decade. Even at that time however, luck saved Brazilian poultry from the oversupply problems that plagued its Thai counterparts.


Large capacity expansions in the late 1990s and early 2000s should have resulted in a huge oversupply. Had Thailand kept its market position of that time, this certainly would have occurred. Fortunately, all this coincided with EU and Japanese restrictions on Thai frozen poultry imports, which greatly boosted European and Asian demand for frozen Brazilian chicken. Accounting for less than a fifth of poultry exports in the early 1990s and 45% of world poultry shipments in 2003, these factors made Brazilian poultry account for approximately 50% of global poultry exports in the years 2005 to 2009 inclusive.


With Thai frozen chicken banned from the market and a high US dollar hampering its American rivals, luck prevented overcapacity from plaguing Brazilian poultry in the first five years of the last decade.


Even so, from 2005 to 2009, domestic Brazilian broiler demand could not keep pace with its government-subsidised output growth. This was particularly true during the 2008 financial crisis, when a 5.7% broiler production jump outpaced a consumption increase of 2.5%. Fortunately for Brazil, its luck came through again: Despite having controlled bird-flu for years, by the late 2000s, frozen Thai chicken had still not received the EU or Japan's blessing. With Asian economies recovering strongly and EU chicken consumption holding up well (relative to other meats) during the recession, a 14.1% jump in 2009 Brazilian poultry exports resulted.

Going forward, with bird flu well under control and major trading partners finally removing restrictions on its frozen chicken, Thailand will regain much of the market share it enjoyed in the late 1990s and early 2000s. The fact that Thai chicken-for-export is AGP free will give it an especially strong advantage against Brazil in markets such as South Korea, the EU and Japan, all of which are tightening their livestock supplement regulations.


Thai poultry exports will also be boosted by rapidly growing Southeast Asian markets, where AFTA has reduced poultry tariffs and quotas in Thailand's ASEAN neighbours. With a similar production costs, lower transport expenses and no import tariffs, Thai chicken will have the upper hand in ASEAN, where fast-growing Vietnam and Indonesia account for 300 million of southeast Asia's 500 million people.

When these dynamics are combined with Brazilian poultry's inability to easily penetrate India or Russia, the net result  is the following: While it has a very large market share, it will have trouble getting new customers in some of the world's largest, fastest growing economies. In all, India, Russia  and ASEAN represent 2 billion emerging market consumers where Thai poultry has the upper hand.


Nor will Brazilian chicken find the going any easier against the United States or in the Americas. The US dollar has fallen more against the Brazilian real than any other emerging market currency. With the US dollar in a long-term secular decline against both the Thai baht and (especially) the Brazilian real, America will keep its remaining two-fifths market share of world broiler exports, especially with NAFTA partner Mexico requiring increasing import volumes.


Under NAFTA rules, Mexico removed most controls over US poultry imports in 2008 -but not those from Brazil. According to the USDA, its broiler imports, currently at 482.8 thousand tonnes, will rise by 2.1% annually to 577 thousand tonnes by 2019. Most of these will be supplied by the neighbouring United States. Brazilian poultry by contrast still faces import restrictions in the 113 million population Mexican market.

...... Brazil's position remains strong

By no means do we wish to imply that Brazil's poultry industry is in decline or that it will do badly. Barring any new poultry diseases or trade barriers, Brazil will keep most, but not all of its recent market gains in the EU.


With Japan finally allowing a resumption of Thai frozen chicken imports, that market is up for grabs, with Thailand  holding a transport cost advantage. On the other hand, China, which clearly prefers to import from Brazil rather than the US, can make up for much of Brazil's impending market share losses in the EU, India, NAFTA, Russia and ASEAN.


All this implies the following: Brazil will keep most of its present market share. Most (but not all) of the poultry market shares it loses  elsewhere will probably be gained back via exports to China, Latin America itself or market growth in its traditional import clients. However, with Thailand enjoying advantages in ASEAN exports, in establishing local Indiana and Russian production and the US regaining its relative competitiveness, Brazil's export market share will edge closer to 40% than the 50% seen in recent years.

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