September 30, 2015

 

A year ago the future looked bright but now, Argentina's broiler sector finds itself in an ironic situation: The industry keeps missing production estimates and its trade performance is highly disappointing, but maintains a very strong competitive position within the world market.

   

  
Venezuela, Russia ruin sunny USDA forecast

Essentially, this is a story of bad luck and of good luck gone bad. A year ago, having exported a record 324,000 tonnes of chicken meat in 2013, a nominal drop in exports to Venezuela looked to be more than offset by Russia's embargo of US and EU chicken.

With Russia substituting Latin America chicken in place of supplies formerly imported from America and Europe, Argentina's poultry sector was on course to enjoy a windfall export performance. In the third quarter of 2014, the USDA optimistically projected exports to rise from 312,000 tonnes in 2013 to 365,000 tonnes in 2014 and 400,000 tonnes this year. 

Due to late 2014's oil price crash, Venezuela has gone from buying 125,000 tonnes or 40% of Argentina's chicken exports two years ago to slightly over 5% or 11,300 tonnes in 2015. Several months after Russia's economic implosion, the USDA downgraded this year's export forecast from 400,000 tonnes to 250,000 tonnes –but even this estimate turned out to be too optimistic.

Soon, Russia's new found appetite for Argentina's chicken turned out to be overwhelmed by a recessionary downturn in meat consumption and import volumes. Russia went from absorbing nearly a tenth of Argentina's 2014 broiler exports or approximately 30,000 tonnes to 4% or slightly over 9,000 tonnes this year.

Adding insult to injury, a free trade agreement between Chile and America resulted in the latter's chicken undercutting Argentine poultry. Chile, which was once Argentine poultry's second largest export customer, slashed its Argentine broiler meat imports by a least a tenth from 2014 levels, to perhaps 18,500 tonnes this year.

  

  
Huge drop in exports

  
On the positive side, with importers anxious to replace bird flu stricken US chicken, Argentine broiler meat exports to the rest of the world, particularly Saudi Arabia, the United Arab Emirates and South Africa are growing at an exceptionally rapid rate. In 2015, exports not destined for Russia, Venezuela or Chile will increase by a whopping 20%, or 35,000 tonnes.

Unfortunately, that is nowhere near enough to counterbalance a massive, 137,000 tonne loss of exports formerly destined for Russia and neighbouring South American countries. As a result, the USDA was again forced to downgrade its export forecasts. Instead of exporting 365,000 tonnes in 2014, it only exported 312,000 tonnes. Instead of coming in at the originally forecasted 400,000 tonnes or revised 250,000 tonnes, the USDA now expects 2015 chicken meat exports to total 210,000 tonnes –a steep 36% drop from 2014's volume.

Because exports fell by a third when they were expected to rise by 28%, many farmers were caught flat-footed. –They eagerly over expanded inventories to take advantage of earlier, optimistic export forecasts and falling feed costs. Several months later, with their expanded flocks maturing, they learned that 2015 exports would be 190,000 tonnes below initial expectations. This is an amount equal to nearly 10% of Argentina's annual broiler production.

Even with falling chicken prices encouraging a large, 6% rise in consumption (from 1.74 to 1.85 million tonnes), rising domestic demand still could not absorb the resulting overproduction. Squeezed between low domestic prices and a large surplus of unsellable poultry meat, a September USDA report noted that, "As a result of these circumstances, three big poultry producers are currently facing bankruptcy procedures."

  

Going forward, 88% of chicken meat production is consumed domestically and per capita poultry consumption jumped from 25kg in 2000 to 43kg this year. Consequently, producers must face the reality that domestic chicken demand will henceforth grow by less than half the 4.5% annual rate of the past fifteen years.

Fortunately, while the quantity of chicken the domestic market can absorb will grow much more slowly, there remains considerable room to increase value-added revenue per kg of chicken sold. According to a USDA survey of Argentine broiler industry stakeholders, large whole birds still account for 65% of domestic consumption. Only 35% is accounted for by chicken parts or processed meat.

As recently as 2014 (before exports to Venezuela nosedived), whole chickens also made up two-thirds of export volume.  However, there are large regional variations within this average figure and the proportion of consumption and exports accounted for by parts is destined to rise.

On one hand, Argentinians living within wealthy, educated urban areas consume 80% chicken parts or processed chicken meat. This consumption profile of this wealthy, upmarket market segment resembles Argentina's export profile, which is mostly unprocessed chicken parts. In fact, because of the stunning 90% drop in exports to Venezuela (which preferred to import whole chickens), the proportion of exported poultry meat consisting of parts has risen to new highs.

On the other hand, large, whole chickens still account for 80% of domestic consumption in the rest of the country. This has forces the roughly 40 companies that make up its poultry sector to grow two very distinct broiler meat lines.
 

Two-thirds of chickens are intended for the mainstream domestic mass market and grown for up to 51 days into the 2.2kg to 2.4kg range. The one-third of broilers designated for export or to be made into domestically consumed chicken parts are grown for no more than 40 days and weigh 1.8kg to 2.0kg.

As consumers transition to shorter cooking times, ready-to-eat meals and fast food, the proportion of Argentine consumption accounted for by chicken parts and processed chicken will rise. Hence, while the domestic chicken demand will rise more slowly than before in volume terms, revenue per unit of domestically consumed chicken should show a significant increase over the next decade.

 

Moreover, despite the catastrophic export losses in Russia and Venezuela, Argentina's long-term potential to become a top five chicken exporter remains intact. It is tied with Brazil for the lowest feed costs in the world and the lowest broiler production costs of any leading exporter.

Going forward, the USDA states that alongside an excellent reputation for sanitary protocols and high hygiene standards, Argentina's broiler sector is, "vertically integrated to a significant degree which allows for production efficiency." It also noted that the industry, "Has made large improvements in expanding plants and purchasing equipment in the last few years."

Moreover, partly because it been aggressively exporting poultry for less than a decade, only 15 of Argentina's 58 chicken processing plants have been approved for exporting chicken meat. An additional 10 plants have only been approved for exporting chicken feet, of which 31,500 tonnes were are shipped to China annually.

At this time, Argentina's Chamber of Poultry Processors (CEPA) are in talks with various Asian countries to get these ten plants approved for exporting broiler meat and not just chicken feet.  If even half of these ten plants are approved, even without new investments, Argentina's chicken exporting capacity would exceed 600,000 tonnes.

It will take a few years for Argentina to make up its unavoidable market losses in Russia and Venezuela. Nevertheless, demand for its chicken is growing in all other major importing regions. It is still on track to challenge Thailand and China as the world's third largest broiler exporter by the turn of the decade.