May 18, 2015
Opportunities and challenges for Thai chicken
Exports earnings trail booming volumes, amid slack domestic consumption and hopeful trade negotiations.
By Eric J. BROOKS
An eFeedLink Hot Topic
It has been a mixed year for Thailand's broiler sector. Exports are higher than expected but this is being offset by lower than expected broiler prices, both in Thailand itself and in overseas markets.
Export growth, trade liberalization
On the positive side, broiler exports increased strongly in 2014; anywhere from 10% as estimated by some private analysts to the more conservative 7.7% figure cited by the USDA. Moreover, after being forced by an eight year ban after 2004's bird flu outbreak to become an expert cooked chicken exporter, frozen chicken is making a gigantic comeback. According to Rabobank's Q1 Poultry Quarterly, "Processed chicken exports declined by 3% while raw [frozen] chicken exports increased by 75%, mainly due to the reopening of these markets in the EU and Japan." After reopening its market to Thai frozen chicken, a significant proportion of EU's broiler meat imports shifted from Brazil to Thailand, causing the latter's exports to the continent to rise 10%, from 253,000 tonnes in 2013 to 270,000 tonnes last year.
Because Japan only reopened its market to frozen Thai chicken at the very end of 2013, exports of frozen chicken to that country jumped 18%, jumping to 250,000 tonnes in 2014, from 211,000 tonnes the previous year.
The Thai Broiler Exporter Processors Association reports that at 140,000 tonnes, first quarter broiler export volumes were 20% higher than 166,666 tonnes for the same period of 2014. Association president Kukrit Arepagorn expects expansion's pace to moderate but still sees 2015 export volumes rising 6% to 7% and totaling up to 620,000 tonnes. Aside from the fact that processed chicken volumes fell, there was one other weak spot in the past year's trade performance: Thailand becoming dangerously over-dependent on the EU and Japan, which accounted for 89.7% of its export destinations.
Having said that, the country is taking steps to diversify its broiler trade portfolio and last year's momentum is carrying itself into 2015. Although the USDA conservatively forecast Thai chicken exports to rise 4.4%, from 546,000 tonnes last year to 570,000 tonnes in 2015, recent events imply that they will exceed 600,000 tonnes for the first time.
Increased demand for Thai chicken from established importers like Japan and Europe has been complemented by unexpectedly strong export growth in newer, frontier markets like South Africa, Malaysia and Cambodia. Exports to the latter two countries benefitted from recent ASEAN trade liberalization rounds, which came into effect this year.
Moreover, steps are being taken to lessen Thai poultry's heavy dependence on the European and Japanese markets. While the second quarter is expected to see the export expansion slow down, a recently concluded Thailand-South Korea free trade agreement, will give an added boost to frozen chicken shipments from mid-year onwards. This should help the industry's broiler trade end the year on a strong note. According to a report by Rabobank Food & Agribusiness Research and Advisory's Q1 Poultry Quarterly, Thailand should be able to export up to 40,000 tonnes to South Korea in the second half of this year, a sum equal to 7.4% of its 2014 export volume.
Thailand is also ambitiously seeking to replace the western chicken imports that Russia banned last year. After Russian Prime Minister Dimitry Medvedev visited Thailand in mid-April, their respective agriculture ministers chaired a formal Subcommission on Agricultural Cooperation, which discussed rules and regulations regarding the inspection of chicken meat for export.
Nominally agreeing that Thai factories wishing to export to Russia must be inspected and certified by Russian authorities, much work still remains to be done. Nevertheless, it would not be surprising if later this year, it is announced that Thai broiler meat will be admitted into Russia under favourable conditions. That could in turn boost Thailand's broiler exports by 10% to 20% --and go a long way towards alleviating anxiety about the last five year's of broiler production capacity investments being made redundant.
Currency troubles dent earnings
Healthy as it is, this export expansion also came at a price. For example, while first quarter export volumes increased 20%, at US$567 million, the value of exported chicken only increased by 8.3%. This is symptomatic of a challenge facing the industry: Currency depreciation in top importers ranging including the EU, Japan and Middle Eastern states have depressed export earnings.
According to Kukrit, in many cases, poultry exports are usually priced in the depreciating currencies of these importers, resulting in a lower revenues when earnings are converted to Thai baht. Moreover, with importers balking at the Thai currency's relative appreciation to the falling Euro and Yen, "buyers are bargaining for lower prices." In Middle Eastern countries where consumption has been dented by the oil price crash, buyers also cite falling consumer demand to put downward pressure on prices.
Mostly due to the impact of these currency market swings, as of early May, the average chicken export price stood slightly under US$3,000/tonne, 10% lower than a year ago. But in all fairness, depreciating earnings priced in an importing country's falling currency is not a problem unique to Thailand's broiler exporters. Fil Olimpo, eFeedLink's Southeast Asia correspondent stated that, "According to a recent report, one Indonesian integrator has opted out from exporting to Japan, despite an existing order, because buying prices were too low."
Along with downward pressure on export prices and earnings, China also represents a potential dark cloud. It recently filed a complaint with the World Trade Organisation (WTO) about what it alleges are discriminatory EU tariffs and quotas for its broiler exports. Chen Fuli, the Chinese ministry of commerce's deputy director of the department of treaty and law stated that, "Chinese poultry exporters pay higher tariffs to sell their products to European buyers. China has decided to sue the EU with the aim of defending the principle of free trade and the interest of our poultry businesses."
While bemoaning how 96% of European poultry imports quotas are awarded to Thailand and Brazil and only 4% to other countries, Beijing is also protesting EU tariffs on Chinese broiler meat, which are 40% higher than those put on Thai chicken.
To be fair, the EU's quota on Chinese chicken meat was only reduced in 2013, shortly after China suffered a serious H7N9 bird flu outbreak that resulted in human deaths. Compared to Thailand which was completely banned from exporting frozen chicken to the EU for eight years after its 2004 H5N1 avian influenza outbreak, China got off very easily indeed.
But as Thailand knows one thing from having its chicken banned long after it put in place stricter farm safety standards that what EU farms use: Trade negotiations have very little to do with fairness. Although this dispute will probably not be resolved any time before late this year, it bears paying attention to -especially when it is becoming ever more reliant on overseas markets.
Weak domestic mkt, strong overseas position
From 21% in 2004, exports now total 37% of Thai broiler production -the exact same proportion of output they held prior to last decade's catastrophic H5N1 outbreak. Moreover, with domestic consumption faltering, dependence on overseas markets can only increase.
In particular, domestic consumption may fail to achieve the 3.2% figure estimated by the USDA. With Thai pork and shrimp prices falling sharply, domestic chicken meat faces serious deflationary pressure from alternative protein lines. With feed costs up a third since 2009 and broiler prices up a tenth, profit margins are much thinner in the 63% of chicken that is consumed domestically.
Having said that, even if Chinese broiler meat enters the EU under lower tariffs and with higher import quotas, Thai chicken, be it frozen or processed, retains considerable advantages. Compared to China's sordid record of food safety scandals (some of which got its chicken banned overseas), Thailand's antibiotic-free chicken exports and stringent biocontainment strategies look impressive by comparison. EU buyers are likely to continue viewing Thailand's chicken as being less expensive than Brazil's but far safer than its Chinese competition.
Going forward, South Korea represents an excellent trade frontier as do its Southeast Asian backyard, where exports are picking up. Should a breakthrough trade liberalization agreement with Russia be finalized within a year, it would give Thailand several years of pent up export demand growth -just as the boom from its frozen chicken's unbanning starts to taper off.
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