July 21, 2016
 
India's broiler sector: Impressive growth, big challenges, bright future
 
By ERIC J. BROOKS
 
An eFeedLink Hot Topic
  
  • A four-fold increase in chicken output over 16 years was made possible by equally impressive productivity gains
  • A lack of food safety scandals has kept growth on a steadier path than is the case in China
  • Boosting chicken consumption requires bridging urban-rural divides through the construction of cold chain infrastructure
  • Integrator debt loads, protectionist feed crop policies, a shift to value-added products and the industry's future are inter-linked
This is a recovery year for India's broiler sector. After rebounding from two years of subpar, 3% growth in the recessionary late 2000s, the years 2010 through 2014 saw chicken meat output and consumption have exceeded expectations. Instead of slowing down to a widely projected 6% to 7% expansion rate, the first half of our decade saw the sector expanding at annual rates ranging from 8.0% to 9.4%.
 
Last year, production expenses and retail prices were inflated by rising feed costs, making for a much smaller 4.7% rise in production. This year however, with cost pressures abating and demand rising, output growth should rebound, rising 7.7% to a record level of 4.2 million tonnes.
 
All this means that in 2016, India is growing and eating 289% or four times more chicken than it did in the year 2000, when production totaled 1.08 million tonnes. Moreover, should 2016's USDA production forecast be met, per capita chicken consumption will have more than tripled in sixteen years, rising 266%, from slightly under 1kg in 2000 to approximately 3.3kg in 2016. –By comparison, while they eat three times more chicken per person, from 2000 through 2016, China's broiler meat production and per capita consumption will have increased by only 37% and 21% respectively.
 
On one hand, despite this impressive, consistent growth in per capita chicken demand, Indians still eat barely a third of the 9.5kg per person consumed in China. On average, Indians eat less than one-fifth the 17kg average annual per capita chicken consumption for the entire world.
 
On the other hand, with over 90% of its 1.2 billion population following strict religious prohibitions against eating red meat, there is no scope for consumers to switching their consumption to pricier beef or pork as incomes rise. Hence, while it will take several more decades to achieve, India's per capita chicken consumption could approach the 40kg level commonly found in developed countries. This implies that there remains at least four decades of rapid, pent-up demand growth in India's vast chicken market.
 
Moreover, the country is in a hurry to get to a higher level of meat consumption: Rather than decelerating into the 6.0% to 7.0% range predicted by the USDA and other analysts, chicken production and consumption annual growth rates jumped significantly higher; from 6.9% in 2005-10 to 7.7% in the five years from 2011 onwards. The consensus is that barring an unforeseen macroeconomic upsets, chicken consumption will continue to rise by an average of 7% annually through to at least 2030. Assuming the industry continues to grow at a 7.5% annual rate over the next ten years and at a 6.6% pace for the following decade, from this year's estimated 4.2 million tonnes, India's poultry output should total 8.6 million tonnes in 2025 and 16.3 million tonnes by 2035.
 
These gains in production and consumption are made possible by equally impressive productivity gains. In an FnB News article ("Poultry Production in India – The Current Scenario", 10 March 2016), Dr. T. Kotaiah, managing director of Indbro Research & Breeding Farms Pvt. Ltd, states that average broiler growth time has fallen steadily; from 60 days in 1975 to 48 days in 1990, 40 days in the late 2000s and 38 days today.
 
Over this same time span, Indian government statistics show a dramatic improvement in feed conversion ratios; from over 3.5 in the mid-1970s, they fell to 2.2 in 1990, 2.0 in 2000 and 1.65 today. Kotaiah estimates that on average, Indian broilers require 0.75 fewer days and 75g less feed to reach maturity with every passing year.
 
These productivity improvements have been driven by relentless industry consolidation, which is producing a smaller, but capital rich and increasingly integrated set of producers. The industry's vertical integration can be seen in a variety of statistics. For example, whereas 80% of newborn chicks were sold to backyard farms in 2002, this year, the proportion is estimated to have fallen to 45% --and over half this total consists of commercial medium scale farms acting as contract farmers to integrators. Not including their contract farming partners, integrators' in-house chick production accounts for half of flock replenishment.
 
From a backyard farm industry forty years ago, over 90% of India's broilers are being grown formal, for commercial sale business enterprises, be they the integrators themselves or their contract farming customers. Of this sum, 70% of is accounted for by a handful of integrators such as Godrej Agrovet, Venkys and Suguna.
 
In tandem with industry consolidation, Indian poultry feed has transitioned from being mostly in mash form several decades ago, to pellet/crumbled form today. Similarly, thanks to the professional management and deep, capital-rich pockets of vertically integrated chicken growers, yesteryear's least cost feed formulations have been replaced by compound feed formulas that produce the greatest growth efficiency.
 
Impressive as the strides that Indian chicken production has made, great disparities remain. For example, wealthy urban residents may eat up to 10kg of chicken per capita annually but the 60% rural majority still consumes only 1kg. Moreover, unlike China where such disparities are driven by income differences, India's urban-rural gap in chicken consumption reflects both infrastructure deficiencies and cultural issues.
 
Chief among these is the fact that almost all of India's chicken meat is distributed from freshly slaughtered live birds at wet markets. Moreover, although the processed chicken segment is growing by up to 20% annually, it has still has a long way to go.
 
From zero percent of all consumption forty years ago and 1% in 1990, processed, chilled or frozen chicken still accounts for less than a tenth of Indian poultry meat demand today. According to Kotaiah, as of 2015, only 7% of chicken sold has been processed.
 
Most of this sum is accounted for by hotels and fast food restaurants, with a much smaller share coming from frozen supermarket chicken or ready-to-eat meals. The other nine-tenths of Indian chicken meat is bought live and slaughtered at wet markets before being promptly brought back home for immediate cooking.
 
But even within these solid consumption statistics, we see anomalies that make the following clear: Bringing Indian consumption up to average world levels requires that a much higher proportion of the product be refrigerated or processed. All this can be seen at the top of the country's demographic pyramid: The wealthiest segment of India's urban population consumes well over 10kg of meat –three times more than the rest of the population– and up to 50% of this amount consists of chicken in frozen, chilled, fast-food, or ready-to-eat meal format.
 
Aside from the high income which allows India's wealthy to eat far more chicken than the rest of the country, there is another factor sustaining their markedly higher consumption: Urban access to cold chain facilities, be they supermarket refrigerators, home refrigerators or fast food restaurant meat freezers, profoundly increases the time and opportunities available for chicken consumption. With a cold storage chain present, chicken can be consumed at anytime and anywhere –and not just within a few hours of leaving a wet market.
 
–Nevertheless, we cannot wholly blame technological deficits: Even when China's own chicken consumption was below 4kg and its rural infrastructure less developed than it is today, it consumed a far higher proportion of chicken meat in processed form than India is at a similar stage of poultry industry development. This is due to a cultural component –and contradiction– to India's abnormally low consumption of refrigerated or processed chicken.
 
On one hand, from reading opinions on this topic, it is clear that a majority of Indian consider a freshly slaughtered chicken more nutritious and hygienic than its frozen or processed meat counterpart. On the other hand, that not explain the exponential expansion of refrigeration-based fast food restaurants –and simultaneous poor uptake of processed chicken. This is true even in urban areas: There we find refrigeration-dependent, chicken-based fast food meals being far more widely accepted than frozen chicken parts or ready-to-eat poultry-based meals offered by integrator owned retail shops.
 
Commentators on this issue assume that Indian consumers trust McDonalds and KFC to keep their freezers with frozen chicken running all night, but don't trust local shop owners to do the same. On one hand, this idea is plausible: It is indeed possible that Indians are more sensitive about this matter than their counterparts in other countries.
 
On the other hand, even though small shop owners all over Asia have been known to turn off refrigerators at night, this did not stop frozen, processed chicken from becoming a much larger proportion of overall consumption in low income countries ranging from China to the Philippines. Consequently, while distrust of shop owners could indeed be holding back India's consumption of processed chicken, this article's author cannot find a definitive statistical evidence to confirm it to be a fact.
 
Whatever the reason for this contradiction, in one way, the shunning of processed chicken holds back the supply of Indian chicken meat as much as it does demand for it: Government figures show that 5% of Indian poultry are raised in closed, climate controlled housings. The reason lies in the way that a predominance of wet market, live bird sales undermine these costly hygiene measures: It makes no economic sense to safeguard broilers from biohazards for 99% of their lives, then suddenly turn them into potential disease vectors for the remaining 1%.
 
With wet markets undermining biosecurity efforts, Thai-style, compartmentalized bio containment housings will not be effective in India. This is also why Thailand got its mid-2000s bird flu epidemics under control. India by comparison, has endured over 90 bird flu outbreaks since 2004. It is wet market's undermining of such biosecurity measures that allows bird flu to break out in India almost every year.
 
Moreover, by limiting the time and occasions when rural residents can enjoy a chicken-based meal, rural India's reliance on wet markets can hold back longterm consumption growth. It should be remembered that in China, when consumption of various meat lines approached developed country levels in urban areas, its cold chain infrastructure started to penetrate into the countryside. This enabled rural area per capita protein consumption started to 'catch up' to that of more mature urban zones, thereby giving China another 20 years of rapid meat demand growth.
 
Going forward, India's per capita chicken consumption can continue growing rapidly from its low base for at least another ten years, but sooner or later, it needs rural residents to boost their consumption faster than the overall trend, not more slowly as is the case today. –That will require everything from an upgraded rural cold chain infrastructure to a more extensive, black-out free distribution of electric power into the countryside and an easing of consumer fears about frozen meat.
 
Finally, for the country's integrators, the need to boost consumption of processed chicken is also a dollars-and-cents issue. According to a report released in January 2016 by European agricultural institute INRA, the cost of financing mergers and takeovers has coincided with feed costs rising faster than chicken prices.
 
Consequently, "Sizeable debt added over the years combined with a moderation in accruals has resulted in deterioration of capital structure and coverage indicators for the industry. Debt gearing for ICRA's set of ten large [Indian] integrators increased to 2.0x in FY2015 from 1.4x in FY2012." At the same time, INRA reported that broiler integrators' revenue:interest expense ratio fell from 3.4:1 in 2012 to a much thinner (and riskier) 1.8:1 in 2015.
 
There is a hidden government hand behind Indian poultry's deteriorating finances: The truth is that Indian broiler feed demand has outrun its domestic input base, particularly in the case of soymeal. With the government protecting feed crop farmers from imports at cheaper international prices, the industry is finding its profit margins squeezed just as its debt burden peaks.
 
INRA notes that while integrators cannot afford feeling the strain of high debt leverage levels, "Companies having a strong presence in value-added [processed chicken] segments would be able to sustain the liquidity pressure." Hence, at a time when industry margins are getting dangerously thin relative to their debt load, inducing consumers to substitute value-added frozen or processed chicken in place of freshly slaughtered live birds could go a long way towards restoring the industry's financial soundness.
 
Finally, mass investments in cold chain infrastructure are necessary if Indian poultry is to survive in a globalized trading environment. For while consumers have borne the brunt of India's high feed costs, this will soon change: The WTO has ordered India to open up its market to US chicken parts in 2017. While India's broiler productivity is certainly lower, it is mostly because of high, government protected domestic feed costs that Indian chicken parts cost 2.5 to 3.0 times more than their US competitors.
 
Although this is causing great consternation among broiler sector stakeholders, the short-term impact will be muted: Ironically, because all imported chicken is frozen, India's lack of cold chain facilities actually protects domestic producers. INRA's report notes that, "The WTO ruling to allow US poultry imports in India is expected to have minimal impact in near to medium term, given domestic preference for live market and limited cold chain infrastructure available."
 
Paradoxically, it is also the expansion of cold chain storage infrastructure that is key to India surviving the liberalization of its poultry trade unscathed. A certain amount of import penetration, be they from US chicken or that of other countries, is inevitable. Fortunately, much like China, India's market is too large for imports to account for a large proportion of consumption.
 
From a supply-side perspective, imports could be offset by exporting chicken to its nearby South Asian and Middle Eastern neighbors. However, as chicken can only be exported via end-to-end, nationwide cold storage chains need to be constructed first. INRA notes that India's "Transition from a predominantly live bird/wet market to a chilled/frozen market would be crucial for the
future growth of the domestic poultry industry as well as to increase presence in international trade where India currently has a negligible presence."
 
For in the long run, India must go the way of China, where cheaper imports of some chicken parts are mostly offset by exports of other parts. –But to do so, in addition to developing cold storage infrastructure, India probably needs to do as China did: Allowing in mass imports of soy would both help make its chicken competitive against US imports and make it ready to be exported to nearby countries when sufficient cold chain capability is developed.
 
Over the next decade or so, these issues can be ignored: So long as the economy grows at a reasonable rate, there is plenty of pent up demand growth that can power the poultry sector at near present growth rates for at least a decade. Over the long run however, the growing interplay between high feed costs, integrator indebtedness, missing cold chain infrastructure, paradoxical attitudes to processed chicken and free trade must be addressed.
 
For all these reasons, developing a cold chain distribution system, marketing campaigns that boost processed chicken to 25% or more of consumption and a simultaneous, cost cutting liberalization of India's corn and soy trade are all essential components of the industry's longterm success.
 
Table 1: Indian broiler sector efficiency, then and now

 

   

1990

2015

 

Broiler parents housed (head)

7 million

35 million

 

Broilers/month raised (head)

50 million

250 million

 

Broiler integration

0%

60%

 

Average feed conversion ratio

2.2

1.65

 

Days to slaughter (2 kg)

48

38

 

Multi-age group farms

90%

10%

 

Chicken sold in processed, non-live form

1%

7%

 

Percent of broilers grown using AGPs

Nil

50%

Source: Table Adapted from “Poultry Production in India - The Current Scenario”, FnB News, 10 March 2016,
            www.fnbnews.com/Poultry/poultry-production-in-india--the-current-scenario-38620



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