April 4, 2016
 
Brazilian broilers: Exceeding expectations, feed cost inflation and the revenge of a currency devaluation

 

By Eric J. BROOKS
 
An eFeedLink Hot Iopic
 
  • Bird flu, a depreciating currency and trade liberalization induced exceptionally strong export growth
  • Faltering domestic consumption has dragged the industry's long-term growth rate to below 2%
  • A collapsing currency made feed corn cost 50% more, soymeal 18% while electrical costs rose by 20%. It could undermine this year's growth forecasts

Every time Brazil's poultry sector is poised to settle into the slower growth that comes with maturity, exceptional events reignite its growth back to near boom-time levels. The only problem is that this time around, the very factors which are stimulating Brazil's broiler industry will work to undermine it –unless another extraordinary event comes along.


Without such luck, Brazil's poultry sector should have faced the woes of economic maturity from the late 2000s onwards. Instead, five years ago, poultry demand from emerging markets and tsunami devastated Japan boosted exports. By lucky coincidence, at that time, Thai chicken was banned in many countries and America's poultry sector was too unprofitable to boost production.


Several years later, when Thai chicken started giving Brazil a lot of competition, luck again went Brazil's way: America suffered a bird flu epidemic.


This created a market supply vacuum, as intermittent export bans on US chicken meat coincided with steep drop in the Brazilian real's value; it fell from an average of BRL2.36/US$ in 2014 to BRL4.00/US$ in late 2015. With its currency falling a whopping 69% against the US dollar and 45% against Thailand's baht, demand for Brazilian chicken rose just as its price plummeted in international markets.


America's poultry market retreat and Brazil's falling currency dovetailed with other trade-friendly developments. Brazilian chicken gained access to Pakistan and Myanmar's markets (totaling nearly 240 million people) for the first time. It also increased by over 100 the total number of poultry processing plants approved for exporting to Russia, Malaysia, China and Mexico.


China approved 47 additional chicken processing plants for export by February 2016 from a year earlier. It is expected to overtake Japan as the second largest customer of Brazilian chicken, after Saudi Arabia.

 

Indeed, China is turning into a very big trade win for Brazil: Less than ten years ago, the US supplied 90% of China's poultry meat imports, which were mostly chicken feet. Although Brazil's chicken feet are said to be of lower quality than their US competition, Chinese import barriers against US chicken feet imports and Brazil's recent currency devaluation are putting them on a strong position in the world's most populous country.


Although shipments to China rose by 29.5% or 70,000 tonnes to 307,000 tonnes, this was counterbalanced by an equivalent, 70,000 tonne drop in exports to Hong Kong: New trade agreements with China made re-exports to China via Hong Kong unnecessary. Going forward, the newly approved plants are expected to boost total shipments to China and Hong Kong by several hundred thousand tonnes over the next few years.


The real's devaluation also made Brazilian chicken popular in South Korea, which saw its imports of Brazilian chicken skyrocket 73%, to 93,285 tonnes.


Similarly, Mexico's restrictions on America's bird-flu afflicted poultry was leveraged to get 16 additional processing plants approved for export to that country. Although the US usually supplies 80% to 90% of Mexico's chicken meat imports of 770,000 tonnes, Brazil hopes it can leverage these plant approvals to supply 200,000 tonnes or over 20% of Mexico's market within a few years.

 

Overall however, the Middle East has become Brazil's most important market, absorbing 1.5 million tonnes or nearly 40% of the country's broiler meat exports. Moreover, the region is rising in importance. 2015 exports to Saudi Arabia rose 21.8%, to 789,302 tonnes; those to the United Arab Emirates up 18.2% to 303,737 tonnes, Kuwait up by 19.9% to 121,615 tonnes, Qatar by 33% to 60,342 tonnes, and Oman up 30%, to 83,384 tonnes.


Notwithstanding 30,000 tonne to 50,000 tonne declines in exports to oil-crash impacted Russia, Yemen, and Angola, the only stain on Brazil's export performance was Venezuela. The oil price crash did more than induce a 70,000 tonne, 34% drop in exports; it also made Venezuela default on payments for the previous year's poultry exports too. Nevertheless, all this was inconsequential compared to combined Asian and Middle Eastern export volumes rising by several hundred thousand tonnes.


Thus, instead of rising a USDA estimated 3.1%, 2015 exports rose a much stronger 8%, from 2014's 3.558 million tonnes to 3.841 million tonnes in 2015. With exports rising by more than 10% annually in the latter half of last year, many assume that growth momentum will carry into 2016. Instead of totaling 3.88 million tonnes as initially expected, the USDA expects Brazil's 2016 broiler meat to rise another 7.8%, to 4.14 million tonnes –though as we shall see, this estimate may be too optimistic.


Nevertheless, surging exports hide the fact that a once buoyant domestic market is in depressed state. With Brazil's economy undergoing recession or stagnation for a third consecutive year, domestic consumption only rose 1.9% last year, to 9.31 million tonnes. This year, with economic conditions continuing to worsen, chicken consumption growth is falling below population growth. Domestic consumption's 1% increase to 9.4 million tonnes is mostly due to the substitution of less expensive white meat in place of red.


As the attached chart shows, while broiler farming has expanded more than was expected, after 2010, this was solely due to exports –but 70% of chicken is consumed in the stagnant domestic market.


From 2005 to 2010, output and domestic consumption rose at a cumulative annual growth rate (CAGR) of 9.4% and 5.7% domestically. The gap between production and consumption growth was easily bridged by exports, which expanded by 26% annually over this time. Thereafter, 2005 to 2010 was the broiler sector's most balanced era. Consumption boomed at a 6.5% CAGR, but with exports only growing by 3.6% annually, production increased by a still strong 5.7% per year.


The years after 2010 however, tell a different story:  From 2010 to 2015, approximately 70% of Brazil's chicken meat was consumed domestically, just as it was during the boom years. However, due to serious economic problems, domestic consumption only increased by 0.6% annually. Exports are only expanding by a fraction of their former pace. Even so, their 3.6% CAGR over the last five years is the only thing that kept production rising, though at a very anemic 1.6% annual rate.


Even exports however, are not doing as well as they seem: Both 2011's 5%+ expansion and 2015's 8% export growth were both due to extraordinary, one-off circumstances. Brazil's dominant 40% share of the world market means that it cannot easily grow by stealing market share the way a smaller competitor could –and the world market at this time, is only expanding 3% annually. This serious slowdown in Brazilian poultry's domestic and external markets is decelerating its once buoyant growth.


Coinciding with falling demand growth are macroeconomic-induced supply-side constraints. In our era of feed price deflation, Brazil's skyrocketing feed costs may feel odd, as it is certainly the most feedgrain-rich nation on earth. Ironically, the same currency devaluation which made Brazilian chicken meat ridiculously cheap overseas is destroying is feed cost advantage.


The real's devaluation made exporting corn 55% more profitable than a year earlier, while domestic corn returns stayed flat. According to the USDA, this caused feed corn's domestic price to rise 50%. –Oddly, so much corn was exported that by early this year, Brazil, which is usually the second largest corn exporter, found itself importing corn from neighboring Argentina.


In a January 11 206 interview at his industry group's website (http://sindiracoes.org.br), Dr. Ariovaldo Zani, CEO of the Brazil Feed Industry Association (SINDIRACOES) states that, "In addition to the imported feedstuffs (mainly additives) whose prices are indexed to the dollar, the price of corn skyrocketed, while soymeal rose 31%."


Moreover, with Brazil's currency falling by even more than the cost of oil (which, like feedgrain, is priced in US dollars), even broiler farm electrical bills jumped 20% over the last year. Zani explains that, "The fast pace of [currency] depreciation and high volatility that plagued Brazil greatly increased the cost pressure on inflation…due to the increase in electricity, fuel, fertilizer and other input costs quoted in US dollars."


In response to these cost spikes, smaller, undercapitalized broiler farms are being forced to cut their production. According to Zani, "They are eager to increase working capital in order to pay for feedstuffs and power whose prices rose a lot during the year."


Hence, whatever advantage currency depreciation gave to Brazil in lower short-term broiler exporting prices is now inducing gigantic increases in input costs. If the rising cost of Brazilian chicken exports relative to its foreign competition is not enough of a brake on industry momentum, some companies will need to slash production in the face of lower expected returns.


On one hand, all that will not be enough to reduce the volume of Brazilian broiler exports. These cost pressures, in fact, could even encourage larger, export-oriented integrators to gain market share at the expense of smaller firms.

 

On the other hand, with Brazilian chicken suddenly getting significantly more expensive relative to its competitors and fewer companies in a position to export, 2016's exports may rise by less than half the USDA projected 7.8% increase. With the economy still in decline, output, rather than rising 0.4%, could fall, as the 1% projected rise in domestic consumption appears increasingly less likely. 


In the longrun, Brazil's currency will return to normal levels and its feed costs will fall to compensate for the real's rising value. Nevertheless, even when this short-term industry slowdown ends, the deeper challenge of marketing Brazilian chicken in new ways that can defy declining industry growth rates will remain.
 
 
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