November 2, 2017
Turkey: Latin American woes and a slow, painful recovery
Like Argentina, Turkey's broiler sector saw major export markets shut their doors. Like Brazil, its economy tanked and currency fell by 50% --but Turkey's circumstances made for a very different outcome. Will economic recovery or a trade deal change its fortunes in 2018?
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After two years of crisis and trouble, Turkey's broiler sector is experiencing a welcome but modest improvement. Helped by ISIS military defeats and an improving security and business environment in neighboring countries, exports have rebounded ahead of expectations. Bird flu, which caused consumption to drop and exacerbated export difficulties, has not afflicted Turkish broilers since December 2016.
Instead of shipping a USDA forecast 296,000 tonnes of broiler meat in 2016, exports totaled 320,000 tonnes. Indeed, while terror attacks, bird flu outbreaks and temporary trade barriers took their toll, the 18% fall in exports from 2014's record 378,000 tonnes was never as bad as feared -and nothing compared to the 60% fall in exports that Argentina suffered when its export destinations were disrupted.
This year will see exports rise another 12.5%, to 360,000 tonnes. Even so, despite another 4.2% rise expected in 2018 shipments, broiler meat exports will still be lower than they were in 2014. Moreover, Turkey's once buoyant economy is no longer taking up the slack from the stagnant trade performance.
After falling sharply by 3% from 2014 to 2016, all this will stimulate production to increase 4% this year. The problem is that when this export surge tapers off next year, it is expected to revert back to a nominal 1% increase in production for 2018. As a glance at the attached graphs can attest, this is but a shadow of Turkish poultry's dynamic, pre-2014 growth.
In fact, a domestic economic slowdown has more than offset the improvement in exports. While domestic consumption has been unusually volatile, from 2000 through 2013, it grew by an average of 6.1% annually.  Had this growth pace been maintained, Turks would have consumed 2 million tonnes of chicken meat by 2018. Instead, they are expected to eat a USDA estimated 1.6 million tonnes next year, 25% less than what their industry's previous growth momentum would have expected at this time.
Consequently, per capita consumption was on track to be in the 22kg to 24kg range by now but has languished slightly above 19kg for the better part of five years. Whereas consumption used to be driven rising per capita consumption, since 2015 it has barely tracked Turkey's population growth.

That's because Turkey's economy took a turn for the worse around the same time that its trade troubles started. Later, just as the economy underwent a recession, a failed coup attempt brought a political crackdown and disrupted business, further impacting chicken consumption. Both were impacted by the terror movements, civil wars and lawlessness that broke out in southeastern Turkey and neighboring nations including Syria and Iraq during the middle of this decade.
Output expansion was previously driven by comparably strong domestic and export fundamentals, but neither has been since 2014. From 2000 through 2014, production expanded an average of 8.6% yearly. -But from 2014 through 2018 inclusive, it will have risen by an immaterial 0.3% per year: This is markedly slower than the expansion rate of a mature poultry market like the US, where consumption growth often exceeds 2%.
Essentially, both domestic consumption and exports ground to a halt after mid-decade. Exports are now staging a good recovery, with volumes expected to rise another 4.2% in 2018, to 375,000 tonnes. With a little luck, they may even exceed their 2014 all-time high of 379,000 tonnes. Unfortunately, having already established a dominant market position in nations like Iraq, exports can no longer grow faster than the economies of its trading partners.
With Iraq absorbing half of shipments, its potential is near saturation point. The Iraqi economy's long-term growth rate guarantees respectable single-digit growth going forward. While Libya, Syria and Congo have seen aggressive growth in Turkish broiler imports, it is not believed momentum can be maintained if their political stability and internal poultry production of these nations recover.
China and Vietnam have seen an aggressive increase in imports of Turkish chicken feet, but these are lower value parts that generate below-average revenues. -And that points to a major source of financial strain on Turkish integrators: While H1 2017 poultry meat exports (of 180,000 tonnes) are down 10% from H1 2014 volumes (of 200,000 tonnes), revenues fell by a far steeper 27%, from US$330 million in H1 2015 to US$240 million in the first six months of this year.
While Russia and Gulf Coast states such as Kuwait, Saudi Arabia and UAE are geographically close and demand pricier cuts, in these markets Turkey is undercut by lower cost exports of Brazilian and American chicken meat.
The one great hope for Turkish broiler meat exports is the EU, from which it is presently prohibited from exporting to. It would love to have access to the EU market that nations from Poland to Thailand take for granted. Doing so would give the industry up to five years of strong, trade driven growth.
Towards this end, Turkey's government has introduced EU-style regionalization legislation for avian influenza, which is based on the EU regionalization procedures, will enable it to access the vast European market. Somewhat similar to Thailand's 'compartmentalization' strategy, it is hoped that by creating zones free of diseases like bird flu, it will eventually enable to Turkey to export from such districts to the EU and other large markets.
With export growth tailing off and recession-dented consumption rising a nominal 0.6% for a second consecutive year, 2018 production is projected at 1.975 million tonnes -a sixth consecutive year that output has stayed slightly above 1.9 million tonnes.
Alongside trade woes and slack domestic demand, there are also many supply-side pressures. Like Brazil, Turkey has seen its currency fall by over 50% over the last four years -but unlike Brail, Turkey imports almost all its soybeans and 20% to 30% of its corn. When other inputs are factored in, the USDA estimates that 40% of feed by value is imported. It notes that "Imported feed inputs are relatively expensive and paid in foreign currency, while the majority of the poultry is sold domestically in [depreciated] local currency."
This means that while Brazil's depreciated currency makes its chicken cheaper and more competitive, Turkey's depreciated lira has badly inflated the feed costs of chicken growers. The industry is thus dealing with a much higher production cost level than it was four years ago when exports were growing rapidly and costs were under control.
Due to such cost pressures, low domestic prices, stagnant consumption and a large drop off in exports, severe losses and bankruptcies resulted. According to the USDA, "2015 was the worst year for production and export. Despite increases in 2016, those gains were not able to compensate for 2015 losses." As a result, leading broiler growers Aytac and Mudurnu closed because of massive financial losses.
Even so, Turkey has a lot of long-term potential: Should the economy start growing again and the currency revert to normal levels, the country could become an effective exporter to Arab Gulf states. The USDA states that "Ongoing attempts by the ministry of food, agriculture and livestock and the poultry sector to open new and previously closed foreign markets [such as the EU] is expected to bear fruit in 2018."
This combination of strong long-term fundamentals and short-term operational difficulties is already attracting foreign investment interest. Brazil Foods SA recently acquired 79.5% of Banvit, Turkey's leading chicken integrator. That way, when Turkey gains market access to the EU or its currency rises (and lower production costs), Brazil Foods will be in a position to substitute Turkish chicken in place of its Brazilian exports.
Until then, Turkey will enter 2018 in a stabilized but less-than-ideal situation: Domestic demand is slack, exports have recovered to previous levels but are poised to taper off thereafter. A trade liberalization deal with Europe and recovery of the Turkish lira's values could do much to restore the industry's once dynamic growth momentum sometime over the next year.

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