July 29, 2016

Indonesia's broiler sector disappoints optimistic expectations

An eFeedLink Hot Topic
  • 2016's output of 1.64 million tonnes is far below the 2 million tonnes predicted by now; nor does 2.5 million tonnes of chicken production by 2020 appear achievable
  • The problems are mostly on the demand side, as investments in capacity outraced consumption growth, leading to losses
  • Even after integrators culled up to 40% of chicks and six million grandparent stock, a 35% oversupply situation persisted into this year
  • With low oil prices deflating growth prospects and Indonesian poultry missing growth expectations for two decades, market forecasts should be trimmed
  • A change in investment orientation from outright production expansion to more value-added processing is required
For years, Indonesian broilers have been touted as one of the world's most promising protein lines –and disappointing expectations. Sadly, our research during this article implies that this large, promising Southeast Asian meat line continues to underperform and will continue to do so.
That is not to say that this market of 250 million's scope has not grown impressively: Based on USDA statistics, per capita chicken consumption has risen from 2.6kg in 1995 to 5.0kg in 2005 and 6.6kg last year. A 164% increase in per capita consumption over two decades is in itself an impressive achievement. Compounded by a population increase of 28% or 55 million people over two decades to 250 million people today, the production gains and giant market opportunities are real.
On the other hand, just as everyone expected growth to enter its most rapid, flourishing phase, the industry underwent a profound, long-term deceleration –and this is not the first time such a thing has happened. Based on USDA statistics, chicken meat output grew at a cumulative annual growth rates (CAGRs) of 9.3% from 1995 through 2000, 4.7% from 2000 through 2005, 5.4% from 2005 through 2010 –and just 2.1% in the years 2010 through 2015 inclusive. This year will see a continuation of this subpar performance, with broiler meat production projected to rise 0.9%: That is growth rate that one expects in mature countries like America; not in Southeast Asia's largest underdeveloped nation.
For example, a recent study commissioned by DBS Bank ("Indonesia's Growing Animal Protein Market", March 2016) predicts 2016 per capita chicken meat consumption of 11.5kg. Two years ago, Rabobank published a study (Industry Note #451: "Time to Hatch a Plan for Indonesia Poultry", July 2014) that projected 2015 broiler output would be close to 2 million tonnes, while stating that it could total 2.5 million tonnes by 2018.
In reality, even the USDA was forced to trim its more conservative, initial 2016 broiler meat output forecast from 1.76 million tonnes to 1.64 million tonnes –nowhere the 2 million tonnes commonly assumed several years earlier. Based on Indonesia's 250 million population, with almost no imports, no exports and domestic demand nearly equaling production, per capita chicken consumption in 2016 will be 6.6kg –not the 11.5kg forecast in DBS's report or even the more conservative 7.4kg estimated by Rabobank two years ago.
As happened several previous times since the late 1990s, Indonesian poultry's below average performance can be traced to the fact that while supply and productive capacity expanded, demand for chicken meat was much softer than expected. As was the case in a previous poultry market crash fifteen years ago, this is mostly due to macroeconomic factors beyond the industry's control.

The oil price crash induced a devaluation of Indonesia's rupiah. As a result, Indonesian incomes, which had been growing strongly, fell sharply in US dollar terms. From US$3,744 per person in 2011, per capita GDP fell 8.7%, to US$3,430 this year. This left Indonesians with significantly less money to spend on poultry, which accounts for 86% of protein consumption.
Along with decelerating Indonesia's economy, the falling currency boosted the cost of imported feed materials and reduced consumer spending power. DBS's report notes that, "Over the past two years, supply has outpaced demand", stating that this was due to, "A combination of over-investment…and weaker purchasing power (lower commodity prices, higher cost of living due to subsidy removal, and a weaker rupiah)."
In many cases, government intervention, though well intentioned, made things worse. For example, a mid-2015 ban on Australian cattle imports resulted in consumers substituting en masse poultry in place of beef. This resulted in a short-lived oddity where, despite being oversupplied, live broilers briefly jumped 20% from their market bottoms early in the year, to IR20,250 (US$1.40/kg) by early September.
With depressed oil prices slowing down the economy, chick producers found themselves with 20% more chicks than the market could absorb in 2014 and 2015. Chick makers were operating at a loss and further down the supply chain, so were their broiler farming customers.
By late 2015, with live broiler production running up to 30% ahead of consumption, prices crashed, with live chickens were selling at 15% to 20% below their production costs.  –And this happened even after breeders discarded up to 40% of their unhatched chick eggs in the first three quarters of 2015.
Finally, to try and bring order to this chaotic market, September 2015 saw Indonesia's government co-ordinate a mass culling of six million parent stock, with three million to be killed by CP, which accounts for half of the country's broiler replenishment. Four million grandparent stock where culled in Q4 2015, with another two million eliminated in Q1 2016.
But with consumption refusing to match optimistic growth projections, even all the above mass culling of chicks and grandparent stock was not enough to balance production with consumption: Early 2016 saw a three-year tendency for broiler making to either nominally break-even or net losses extend into the early part of this year.
Moreover, even with poor returns discouraging further expansion, as of mid-2016, with the economy stagnating, the oversupply situation persists: The Indonesian Poultry Breeder Association projects that for 2016, the industry will be oversupplied by up to 35%.
The moral of the story is: If Indonesia's chicken consumption had grown as strongly as analysts had projected, production would now be above 2 million tonnes, not below 1.7 million tonnes –and there would be no oversupply of broilers, no need to undertake mass cullings of chicks and grandparent stock.
By incorporating optimistic consumption projections into their investment decisions, the industry assumed that by now, each Indonesian would be eating close to 10kg of chicken instead of less than 7kg. Nor is it the first time industry forecasts have been upset. From the late 1990s to the mid-2000s, the chaos following 1998's overthrow of the government resulted broiler production's CAGR falling to less than half its previous 9% expansion rate.
In the late 2000s and early part of this decade, production again grew by 7% annually, leading analysts to believe that the industry would resume expanding at close to the 9% rates seen earlier. Instead, after 2010, the five-year growth trend fell to 2%, with chicken meat production poised to expand an anemic 0.9% this year.
This time around, with energy prices forecast to remain low for an extended time, Indonesia's petro-driven meat consumption looks set grow at sub-par rates up to year 2020; and perhaps beyond. For two decades, political and macroeconomic considerations have repeatedly undermined Indonesian poultry's bright industry forecasts. Perhaps it is time to start drawing more conservative, realistic growth forecasts for Indonesia's broiler sector –and for producers to invest less in production expansion and more in value-added processing and distribution.

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