October 24, 2017
When everything goes right: Thai broiler exports exceed expectations as consumption growth recovers

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If the 2000s were a time when everything went wrong for Thai broiler integrators, the 2010s have seen everything go right. After enjoying years of export-led growth, domestic consumption is recovering from years of stagnation and leading to more balanced expansion.

Things could not be brighter for Thailand's broiler integrators. After making unprecedented capacity expansions at the turn of the decade, the industry's 5.8% average post-2010 growth rate is faster than that of any other major poultry producing nation. The only time the industry grew faster was in the late 1990s and early 2000s before bird flu struck.

As a result, output exceeded the initially projected 5.1% increase from 1.78 to 1.87 million tonnes, rising a sharper 6.7%, to a USDA estimated 1.90 million tonnes. While consumption's 2.9% increase was only slightly above expectations, 2017 exports are greatly exceeding their 5.8% forecast increase, rising instead 11.6% from 2016's 690,000 tonnes to 770,000 tonnes this year. 

There are several factors behind Thailand's chicken export windfall. First, high domestic chicken prices and low feed costs boosted returns. The resulting higher production then found its way into foreign markets by windfall circumstances, mainly Brazil's misfortune.

Second, Brazil's tainted meat scandal caused Japanese buyers to shift their imports from Brazilian to Thai chicken. It coincided with exceptionally strong demand for poultry meat from importers in Malaysia, Hong Kong and Canada. Third, South Korea allowed the import of frozen Thai chicken for the first time since 2004, creating an export frontier opportunity. South Korea is a new source of demand that may keep broiler exports rising faster than expected into the early 2020s.

The only dim spot in Thai chicken's trade performance is Europe: Due to political pressure to allow in more imported chicken from Eastern European nations, Thailand's EU import quota was kept unchanged. The EU grants Thailand import quotas of 92,610 tonnes for uncooked (frozen) salted chicken meat 5,100 tonnes for uncooked unsalted chicken. The annual EU quota for imported cooked Thai chicken is 160,033 tonnes.
It is also can export to Europe annually 14,000 tonnes of cooked chicken meat products (eg. ready-to-eat-meals) containing 25% to 57% chicken meat and 2,100 tonnes of cooked chicken meat products containing less than 25% chicken meat. The only problem is that Thailand has fully used up its EU cooked chicken quotas every year since 2008 and is close to using up its entire frozen chicken quota too.
Fortunately, with Japan absorbing 51% of Thai exports, new markets like South Korea opening up, the EU's influence on Thai poultry trade fundamentals is gradually waning. Outside of the EU, led by a 17% increase in Japanese purchase volumes, an 18% increase in shipments not destined for Europe drove an 11% to 12% increase in overall H1 2017 exports.

Coinciding with unexpectedly strong export demand, supply was able to increase faster than anticipated. Traditionally relying on America for most of its breeder chickens, its avian influenza outbreak prompted Thailand's bird-flu wary government to ban US grandparent stock in December 2014.

It was assumed that by late 2016 and early 2017, this would have constrained inventory growth and chicken production. Thailand however, managed to make new sourcing arrangements and swiftly switched to French, Dutch, Danish and New Zealand poultry genetic suppliers. While they did not fully substitute for the loss of US grandparent stock, alongside extending the life of older breeders, broiler meat production was not impacted as was initially feared.

Even so, the ban on US grandparent stock cannot be removed fast enough: January to July day-old chick prices climbed 50% to an average of THB17.44/bird (US$0.52/bird) compared to THB11.59/bird (US$0.35/bird) in the first seven months of 2016. Aware of the situation, the department of livestock plans to remove the ban on imports of US breeder stock sometime in late 2017.

While chick prices have inflated production costs, this has been counterbalanced by feed corn and soy prices, which have fallen by 10% and 9% respectively over this same time. The lower feed expenses have offset higher chick prices to keep broiler production costs constant.

Productivity improvements also played a role in sustaining chicken meat production in the face of constrained grandparent stock: Over the past ten years, a mature chicken's finishing weight rose from 2.0 to 2.1kg to 2.3 to 2.4kg. Grow out time fell from 49 days to 41 and the average feed conversion ratio decreased from just under 2.0 to 1.65. The time required to grow a broiler to maturity dropped to 40-42 days from 49 days, and average feed conversion ratio (FCR) decreased to 1.6-1.7 from 1.9-2.0.

Realizing that political considerations will always impede some Thai chicken exports, the industry is using foreign direct investment to get around this problem: Leading integrator CP has long supplied a 10th of China's chicken meat from facilities in the mainland. It is now setting up similar facilities elsewhere.

Aware that the EU would sooner increase Poland's chicken export quota, CP is currently formalizing a joint venture with leading Polish integrator SuperDrob. Such investments should eventually boost Thai exports and revenues from Europe even if the EU keeps its quota unchanged. Keeping its eye on the rapidly developing ASEAN market, CP also has plans to use its expand its existing Vietnamese chicken processing plant as a Southeast Asian export base.

Indeed, the industry's main concern at this time is a healthy case of paranoia: After recovering from 2004's devastating bird flu epidemic, Thailand has gone the entire post-2010 decade without avian influenza cases. Even so, it recalls how its 2004 outbreaks resulted in the banning of its frozen poultry from the EU and Japan for eight years. Thailand is very different now, practicing world leading biocontainment compartmentalization, keeping poultry housings exceptionally clean, restricting access and using evaporative cooling systems, which are proven to reduce disease exposure and mortality rates.

Hence, poultry influenza outbreaks in neighboring Cambodia, Laos, Myanmar and Malaysia has prompted integrators to noticeably step up their biosecurity measures in recent months.

Going forward, exports are expected to rise at a slower, USDA estimated 3.9% pace in 2018, to a record 800,000 tonnes. About 2/3rd of this volume will be value-added cooked chicken, with frozen unprocessed chicken accounting for the rest.

Fortunately, the slowdown in exports will be offset by accelerating domestic consumption. After tumultuous years earlier in the decade, post-2014 political stability is enticing tourism and investment to return to Thailand. Driven by rising personal incomes and an influx of meat-hungry tourists, domestic per capita chicken will exceed 17kg for the first time in 2018. It reflects a projected 4.6% rise in domestic chicken consumption, to 1.18 million tonnes.

All this makes for a sunny end to a promising decade. Not only are exports continuing to grow at a strong (though slower than before pace), domestic demand is finally pulling its weight. The country has years of rapid domestic demand growth ahead before per capita chicken consumption doubles into the 35kg to 40kg range seen in mature markets. Things have not been this good since the late 1990s and for now, they are poised to carry on that way.

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