August 30, 2016

Latin American poultry exporters fly off in different directions

Currency shifts favor Brazil as Argentina succumbs to trade woes

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Argentina: A Once Promising Export Forecast Falls Off a Cliff
  • A cancelled Venezuelan trade agreement, the appreciation of its currency versus Brazil's real tanked its exports to Latin America, where it once dominated the market
  • With exports down 17% on-year and 53% over 3 years, producers are struggling to bring production into balance with demand
  • High debt levels, cancelled subsidies, bloated feed costs drove its second largest producer to bankruptcy
Storm clouds are gathering over Argentina's otherwise promising broiler sector. Several years ago, industry observers expected Argentina to be exporting over 400,000 tonnes of chicken by 2015 and 440,000 tonnes by 2017. Instead it will ship barely a third of this once-projected volume and the attached graph shows just how far below expectations Argentine broiler exports have fallen.
According to Argentine government statistics, at 54,631 tonnes, H1 2016 chicken exports were 24.3% or 17,534 tonnes less than the 71,165 tonnes shipped in H1 2015. Exports, which once accounted for 17% of output had already fallen by 43.7% from their 334,000 tonne peak in 2013 to 188,000 tonnes in 2015.
At this point, even if export momentum picks up in the second half of this year, eFeedLink's forecasted 157,000 tonnes for 2016 exports is not just 32% lower than the USDA's forecasted 230,000 tonnes. Although it implies a 16.5% decline in exports from 2015 levels and 53% fall from their 2013 peak of 334,000 tonnes, our downwardly revised figure might be too optimistic.
Moreover, with beef prices lower than expected, consumers are not eating as much chicken as was anticipated. While domestic consumption looks to expand to no more than 1.94 million tonnes, the resulting 2.3% gain is 36,000 tonnes less than the USDA estimated 1.976 million tonne, 4.3% increase that was expected. With exports coming in at least 70,000 tonnes lower than expected and domestic demand lower than expected, the industry found itself on track for a chicken meat oversupply exceeding 106,000 tonnes, equal to nearly 5% of output.
With Argentine broilers weighing on average 2.7kg, this implies that for supply to come back into balance with demand, at least 40,000 fewer broilers need to be turned into chicken meat –and the industry is taking a step in this direction: According to Argentine agricultural government agency SENASA, at 279.7 million head, from January to May, Argentina slaughtered 8.6% fewer chickens than the 306.0 million than in the same period of 2015.
Depending on how exports perform in the latter half of this year, this implies that the industry needs to slaughter some 15 to 20 million fewer chickens in H2 2016 than it did in the same period of 2015. It will reach that goal however, while under great economic stress.
Mauricio Macri's pro-business government has introduced many liberalizing, pro-agribusiness policies. However, it also cancelled an admittedly lopsided trade agreement with Venezuela. In fact, even before the agreement was cancelled, Venezuela was always in arrears in its payments, particularly for exports of Argentine broiler meat.
As a result, from 140,000 tonnes or 40% of Argentine chicken exports several years ago, Venezuela is buying virtually none this year. However, when the trade agreement cancelled, more than just export volumes were lost: Under the cancelled, "[Venezuelan] oil for [Argentine] food" trade pact, poultry producers received a US$650/tonne subsidy on chicken meat shipped to Venezuela. Unfortunately, even when the agreement and its subsidies were cancelled, loans taken out to take advantage of them remained.
This left many Argentine poultry exporters a huge debt overhang and no buyers with which the debt could be serviced. All this happened as currency depreciation boosted feed costs. This combination of subsidy losses, falling revenues, constant debt service and rising feed costs tipped balance sheets into the red.
As a result, Cresta Roja, the country's second largest broiler grower, was pushed into bankruptcy. According to the USDA, "Exporters also received [US$650/tonne] subsidies for each shipment to Venezuela. The rapid deterioration of the Venezuelan market along with inflationary pressures exacerbated the company's financial burdens, culminating in the closing of their plant."
To add insult to injury, while a new buyer was found for Cresta Roja, its production restart did not go according to plan. The new owner only re-employed 1,800 of 2,700 staff. This lead to public protests which disrupted operations, and government demands that it take on the other 900 workers. This has made Cresta Roja's owners decide to disinvest and now a new buyer is being sought.
Unfortunately, it is difficult to find buyers for a company where up to a third of redundant staff must –as a condition of its sale– be kept on the payrolls. The resulting uncertainty makes it awkward to forecast not just Cresta Roja's future, but the industry's medium-term production and market moves.
For this reason, instead of 2.2 million tonnes, we now forecast output to come in at an eFeedLink estimated 2.08 million tonnes, and if the industry's culling exercise goes well, it may fall below our forecast.
Adding insult to injury, a new free trade agreement between Chile and America resulted in the latter's chicken undercutting Argentine poultry. At the same time, with Brazil's currency falling more against the dollar than Argentina's, its broiler meat also started taking Chilean market share. Chile, which was once Argentine poultry's second largest export customer, will be buying up to a third less broiler meat than it did two years ago.
Brazil: A Lucky Country Gets Lucky Again
  • A currency crash put the real in a favorable position versus its Thai and Argentine competition
  • Taking market share from its competitors, exports are nearly 10% above what was forecasted
  • With its early 2016 feed cost inflation now deflating, any rise in the real will probably be offset by lower production expenses
Ever since 2010, observers have declared Brazil's broiler sector to be 'mature'. While this is true of its domestic market, the industry always seems to get a lucky break overseas. This year is no exception.
The collapse of Argentina's near-barter "oil for food" trade deal with Venezuela means that at 26,500 tonnes, Brazil is exporting several times more chicken meat to Venezuela than Argentina is, with the former once having sold over 100,000 tonnes annually to that country. Similarly, the cheapening of its real means that it is selling almost as much chicken to Chile as Argentina is.
All this is a profound change, as in the past, while Brazil leads the world market, Argentina dominated chicken exports within South America itself. The above figures however, show that this no longer true.
Whereas H1 2016 Argentine exports fell 24%, January to June chicken meat shipments jumped 14.3% from a year earlier. Instead of rising 6.3% from 3.841 million tonnes to 4.09 million tonnes, the USDA now expects Brazilian chicken meat exports to jump 9.3% to 4.2 million tonnes, then grow another 4.8% to 4.4 million tonnes in 2017.

Furthermore, not just in Latin America itself but in promising frontier markets in Southeast Asia, China and the Middle East North Africa (MENA) region, currency shifts have put Brazilian chicken at a competitive advantage, to the chicken exports of not just neighboring Argentina: The Thai currency has risen against the real even more than Argentina's peso.
With US broiler production still recovering from bird flu, this puts Brazil in a catbird position to take advantage of Argentina's and Thailand's relative cost inflation on the world stage. Hence, after falling for several years after the re-entry of Thai chicken into the EU and Japan, Brazil's exports to these countries are rising rapidly –at Thailand's expense.
Thus H1 2016 exports to Japan are jumped a USDA estimated 15% this year to 215,142 tonnes, from 186,952 tonnes. It has also beaten back Thai competition in Europe, with H1 2016 EU exports on track to rise 7.3% to 121,683 tonnes from 113,453 tonnes last year. –In fact, even in Thailand's Southeast Asian backyard, Brazilian H1 2016 chicken exports to Philippines are jumping by 46.7%, from 14,953 tonnes last year to 21,152 tonnes this year. With the Philippine broiler import volumes rising by 1.8%, much of the increase came at Thailand's expense.
Moreover, China recently extended its trade restrictions enacted against US poultry imports in 2010 for another five years. -At the same time however, Beijing is increasing the number of Brazilian poultry processing plants approved for export from 29 early this year to a USDA estimated 40 by early 2017.With China's own poultry domestic poultry production faltering, that creates a large market opening for Brazilian chicken.
As a result, H1 2016 broiler meat exports to China rose a whopping USDA estimated 76%, from 145,000 tonnes in 2015 to 256,000 tonnes this year. This compliments a 23.2% gain in shipments to Russia and export increases ranging from 10% to 30% to South Africa, Iraq, Oman and Mexico.
Brazil's growing trade momentum is further augmented by the recent opening of Malaysia, Myanmar and Pakistan to Brazilian chicken, which creates scope for a 50,000 tonne increase in exports over 2016 and 2017. With 30% of output exported and domestic consumption rising 4%, Brazil is track to grow 13.67 million tonnes of chicken, 4% more than last year and a million tonnes. With its economy now stabilizing and its trade prospects staying bright, Brazil is projected to produce 14.08 million tonnes of chicken in 2017, putting it firmly ahead of third ranked China's 12.7 million tonnes.
While much of this momentum is due to a catastrophic 50% collapse in its currency over two years, even here, Brazil has something on its side: Earlier in the year, the over exporting of a meagre corn harvest and high feed costs was threatening to boost poultry production costs. This threat however, has receded: After rising 33% on-year, government figures indicate that July saw poultry rearing expenses fell 7.1%
Going forward, corn production is expected to total 82 million tonnes, up 6% on 2015-16's total and the second highest level on record. With the prospect of US corn imports further taming prices, Brazil's poultry feed costs should fall by as much or more than any rebound in its currency, which remains at a historically low level.
Thus, Brazil appears poised for at least two years of aggressive, export-oriented growth while Argentina's otherwise low cost, poultry production model is poised to endure pain over the same period. This is in defiance of the previous decade's trend when Argentine output grew faster, the fortunes of Latin America's two largest poultry producers are diverging.

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