December 23, 2011
Hail to the Chicken King!
With its unsurpassed production base, Brazil will reign over the poultry world for at least a decade, if not longer.
An eFeedLink Hot Topic
by Eric J. BROOKS
Brazil's dominance of world poultry is so thorough that it is difficult to believe that it only surpassed America as the number one chicken exporter in 2004. From 2000 to 2011, no country could match Brazil's poultry industry. Over these eleven years, production and exports jumped at average annual rates of 7.3% and 12.9% respectively. While this pace is tapering off, much momentum remains: Cheap and plentiful inputs and beckoning new export markets make a perfect match. Should anything go wrong abroad, buoyant domestic demand mitigates market risks.
Putting distance between Brazil & America
By the end of 2012, the USDA expects Brazil's annual poultry production to total 13.6 million tonnes, of which approximately 3.55 million tonnes will be exported. This will be a healthy 5% rise from 2011's record 12.95 million tonne output and 3.38 million tonnes of exports. With no one to give it competition except for the United States, Brazil has been putting distance between itself and the world's number two chicken exporter.
Whereas America's poultry output has been flat since 2008, from 2007 to 2011, Brazil's chicken meat production shot up by 32%. This is not just due to Brazil's superior export performance: US poultry farms face flat domestic demand and falling consumption of high value cuts like breasts.
By comparison, Brazil's domestic poultry consumption has grown by over 5% annually over the last decade and is poised to keep expanding at a 3.5% to 4.5% annual pace over the next five years. As a result, even though Brazil exports 25% of its poultry and the US only 17%, it was not as impacted as America was by the recent world recession.
Brazilian poultry's healthy domestic fundamentals can be seen in the price of whole chickens. According to a recent USDA GAIN report, they have risen 28.7%, from US$0.87/kg in the third quarter of 2010 to approximately US$1.12/kg in the fourth quarter of 2011. In the US, two times over the last three years, sagging prices for expensive white meat cuts collided with skyrocketing feed costs.
In Brazil's case, during the recession years of 2008 and 2009, falling exports to the EU were easily absorbed by the country's domestic market, which kept expanding in the face of a global recession. To this could be added Brazilian poultry's aggressive entry into new, fast growing markets in the Middle East and North Africa (MENA).
For the US, Russia and China were the leading poultry export destinations and by the late 2000s, both put up trade barriers. When this occurred, the saturated domestic US market could not absorb the excess supply and is in the midst of a major bird culling exercise. For Brazil, 2012 will be the fourth consecutive year that both production and exports have increased by at least 5%. In all, this year's annual poultry production should amount to 13.6 million tonnes.
Currency, boney cuts, cooked poultry are weak spots
Except for the Brazilian real's tendency to appreciate over time, none of the country's other fundamentals are weakening. Although its mid-range wages puts its cooked chicken at a disadvantage to Thailand and China, only feed abundant America and Argentina can match Brazil's low poultry rearing costs.
But wage levels do not matter much to Brazil, as it is a mass poultry producer, not a niche value-added supplier. A September 2011 Rabobank report ("Cross Roads for Growth: The International Poultry Sector Towards 2020") estimated that Brazil accounts for 80% of the world's whole bird exports and 85% of breast meat exports respectively.
Indeed, where it not for exports of bonier, dark meat cuts, the US would not even be able to rival it. At the same time, Brazil is not likely to make any further large export inroads: For whole birds and breasts, its dominant share is near saturation level. For cheaper cuts, America and the EU continue to have large surpluses of bonier, darker meat available for export. Only in labour-intensive processed chicken products such as ready-eat-meals does Brazil have a relatively minor 15% share of the world market.
Going forward, Brazil is distinguished by the fact that it has even more scope for expanding feed crop output than even the United States. Unlike most poultry exporters, this allows Brazil to ramp up production to any level overseas importers demand, without suffering an increase in input costs.
MENA is the new frontier
However, while Brazil's export machine continues to surge, its target markets are clearly changing. The days when much of its chicken went to the EU are fading. Together with China, the Middle East and North Africa (MENA) are now Brazil's most rapidly growing poultry export markets.
This is timely, as its EU import market share is near saturation point. Without MENA replacing the EU, mid year's impending liberalization of Thai frozen chicken exports to Europe implies that Brazil will be losing market share in this part of the world, not to mention its Japanese market position. The tsunami and nuclear accident's radioactive contamination of food led to a 20.3% jump in broiler exports to Japan, which is otherwise a mature, slow growing market. Going forward however, with Japan following the EU's footsteps in allowing Thai frozen chicken imports back into the country, Brazil can expect to lose some market share here too.
Provided that political stability reigns, rapidly growing MENA nations import growth will easily exceed any tailing off of shipments to the EU and Japan. MENA's potential for Brazilian poultry is based on three factors: The region's high population growth rate, inability to economically raise its own poultry and fast, oil-driven economic growth.
Despite the Middle East's many troubles, from January to end-June of 2011, double digit increases were recorded in Brazil's MENA exports to Iran (up 113.6%), Saudi Arabia (19.2%), Iraq (12.9%), Angola (26.6%), Kuwait (9.3%) and Oman(14.8%). Political crisis notwithstanding, MENA's rapid uptake of Brazilian chicken exports is poised to extend into the far future.
It should also be mentioned that this part of the world prefers raw whole birds or dark meat cuts over processed chicken. This means that within MENA's poultry market, Brazil will not face much competition from Thailand or China, which are more likely to export highly processed cooked meat products. However, it can expect to face increasing competition from the United States, which is adjusting its poultry output to export more of the dark meat, bone-in cuts desired by this region. However, it will continue to have much of MENA's whole bird market to itself.
Even here however, the Brazilians do have one significant trump card: Aside from the head start in exporting to MENA they enjoy over the US, the currencies of many MENA countries have appreciated against the US dollar as much as or more than Brazil's own real. This means that in spite of the Brazilian currency's steady appreciation against the US dollar, MENA importers will not see much of a change in the country's poultry export prices.
The export picture was also bright in other parts of Asia. A late 2009 trade dispute saw China impose import duties on US chicken parts such as feet and drum sticks, Thereafter Brazil's yearly poultry exports to China rose by 400% in 2010. The USDA reports that this momentum carried into 2011, with first half exports to China up by a further 70% over 2010 figures.
With China's semi-official bias towards non-American imports, Brazil has taken much of America's share of China's poultry market, and looks set to keep it. As a result, China has overtaken all other East Asian locales except Hong Kong and Japan as a Brazilian poultry export destination -and it is only a matter of time before exports to China overtake those for Japan too.
With poultry demand both inside and outside Brazil growing at comparably healthy rates, the country has nearly everything on its side. Under the most pessimistic scenario, slower import growth in Europe and market losses in East Asia will be more than counterbalanced by its strong position in MENA.
The downside to Brazil's overwhelming dominance means that it has very little additional market share to gain but could lose some to a resurgent Thai or American poultry industries. Depending on how well it fares against the intensified competition, we expect Brazilian poultry exports to rise at a 3.5% to 4.5% annual rate, totaling somewhere between 4.65 million and 5 million tonnes by 2020, with a world market share north of 40%.
All rights reserved. No part of the report may be reproduced without permission from eFeedLink.