December 20, 2016

Thailand's broiler sector: Flying high again


An eFeedLink Tot Topic


  • The substitution of EU grandparent stock in place of banned, bird-flu afflicted US supplies sustained production
  • Improving feed conversion ratios, finishing weights, biosecure housings boosted efficiency and meat safety
  • High red meat prices pushed up domestic broiler prices. Falling input costs, a depreciating baht boosted exports
  • A rising Brazilian real boosted 2016 exports to Japan. A rising US dollar, the reopening of Korea's market is boosting its 2017 fortunes

For the past few years, things have gone better than was expected for Thailand's leading edge, but often challenged broiler industry. Moreover, there are indications that this upturn in Thai poultry's fortunes will continue for some time.

Outside Thailand, America, Europe, India, China, Vietnam and countless other nations that have endured avian influenza outbreaks. Ironically Thailand, which was the first and worst afflicted country, instituted very stringent biosecurity regional outbreak containment policies, closed loop biosecure poultry farms and disease mitigating measures such as evaporative cooling systems. As a result, the country has remained free of major broiler disease outbreaks even as other large producers and rival exporters have endured severe epidemics.

The country's far sighted poultry policies also extended to its external supply chain. Last year, it was feared that a bird-flu driven ban on US breeding stock would lead to supply-side constraints.

Instead, policymakers were very proactive, liberalizing import rules on EU imports. As a result, breedstock supplies from France, Denmark and the Netherlands were substituted in place of US grandparent broilers. Despite a near 25% drop in grandparent stock (from 883.5 to 666.8 thousand birds), the USDA reports that, "Several Thai chick breeding farms prolonged the use of grandparent and parent stocks for chick production, increasing the available supply". 

The keeping of older breedstock beyond its normal productive lifespan was also complimented by superior poultry genetics and better farm management. From 2.00kg to 2.10kg in the mid-2000s, the USDA estimates that poultry finishing weight rose nearly 15%, into the 2.35 to 2.40kg range last year. Feed conversion ratios similarly improved 15%, from around 1.95 a decade ago to 1.65 today.

This longterm boost in supply fundamentals coincided with better profit margins. Led by a 7% drop in feed corn costs, the substitution of fermented soymeal in place of fishmeal and a 20% fall in the baht versus the US dollar, broiler production costs fell more than 8% in local currency terms, from 36.50baht/kg (US$1.20/kg) to 33.50baht/kg (US$0.94/kg). [Note: This currency conversion takes into account changes in the baht/dollar exchange rate over the past year].

Consequently, despite supply constraints, returns rose. Motivated farmers boosted output to take advantage of a fortuitous mix of high red meat prices (leading to strong domestic poultry consumption), stronger international trade competitiveness and unexpectedly high export demand.

Thus, 2015 chicken meat production came in at a USDA estimated 1.70 million tonnes, 8.3% more than 2014's 1.57 million and 55,000 tonnes than the 1.645 million initially projected. 2016 also came in far above expectations: Instead of the 1.58 million tonnes forecast this time last year or 1.72 million tonnes forecast in Q2 of 2016, total chicken meat produced amounted to 1.78 million tonnes, a 4.7% year-on-year increase. And the news just keeps getting better: driven by booming exports, 2017's production is expected to rise an even faster 6.2%, to a record 1.89 million tonnes.

This is not to say the domestic market has been disappointing: Ever since 2015's military coup, the domestic economy has been unexpectedly stable. The resulting 2.9%, 2.8% and 2.7% rises in domestic consumption for 2015, 2016 and 2017 exceeded initial projections by up to 1%.

Trade-wise, thanks to the Brazilian real's sharp fall from the levels of a few years ago, both the value and volume of exports exceeded expectations. Instead of rising by the initial USDA forecast of 6.2% from 546,000 to 580,000 tonnes, 2015's exports jumped a much higher 13.9%, totaling 622,000 tonnes.

It was feared that the breedstock shortage would level off Thailand's poultry trade, limiting exports to a 1.3% increase to 630,000 tonnes in 2016 –but this too was exceeded: Instead, they amounted to a whopping 7.7% increase, to 670,000 tonnes.

Ever since frozen chicken was allowed to re-enter the EU and Japan several years ago, chilled exports have grown faster than those of cooked chicken. The latter held up the sky for the industry during the eight long years when bird flu had it banned from major markets. For H1 2016 however, frozen chicken exports rose 14%, whereas those of cooked chicken increased a slower but still respectable 6%.

Geography-wise, H1 2016 shipments to Japan jumped 11%, twice the pace of chicken exports to the EU (5%) or other major markets (6%). This reflects several factors, such as the Japanese market's re-opening to frozen Thai chicken being slightly later than that of the EU.

It is also because Thailand's frozen chicken exports to the EU are hemmed in by both formal quotas and intensifying, low cost competition from Eastern European suppliers such as Russia and Poland. By comparison, Japan was initially reluctant to substitute Thai frozen chicken in place of Brazilian supplies, but changed its mind in 2016, when a rising Brazilian real made the latter more expensive.

Moreover, even the cost of Brazilian chicken rose in Japanese terms, China's faltering chicken production left less available for export to Japan. All this put Thai chicken at an advantage in Japan, which happens to be the world's largest poultry meat importer. Thus, the EU has gone from absorbing roughly the same proportion of Thai chicken as Japan to buying 41%, versus Japan's 48% share.

With Japan's former Brazilian and Chinese chicken import base faltering, Japan's high domestic prices boosted Thai returns on parts such as boneless chicken legs by 12% to 15%. This helped offset the deflationary EU market, where competition from Eastern European producers slashed selling prices by 10% to 15%. Even so, with Thailand exporting nearly 20% more chicken to Japan than the EU, the revenue enhancing impact of higher Japanese import prices more than offset the deflation in the unit price of exports to Europe, making for a year in which the value of exports also rose.

Over the short term, the US dollar's recent rapid rise may also provide an opportunity for it to seize a small part of America's very large market share. Over the long run however, Thai integrators realize that the only way they can compete against Eastern European producers is to set up operations in this part of the world, which is blessed with lower poultry input costs and comparable labour costs.

Caught between rigid EU import quotas for its frozen chicken and escalating competition from local producers, CP is said to be preparing to either acquire Eastern European integrators or establish local integrated operations within lower cost EU countries.

Even so, the news just keeps getting better: On the domestic front, a recovering Thai economy and a tourism-led rise in meat demand means that this coming year's chicken consumption is forecast to rise 2.7%, well ahead of its 0.3% annual population increase. While not as impressive as Thai chicken's trade performance, per capita chicken consumption has risen from 10kg in 1995 to 12kg in 2005 and almost 17kg in 2017.

Moreover, while domestic consumption is rising more slowly, its value-added component is rising in importance. In particular, demand for ready-to-eat chicken meals and chicken consumed at fast food restaurants is growing approximately at twice the 2.0% to 2.5% average rate of this meat line's overall consumption. Moreover, the faster growth in cooked chicken in Thailand's domestic market is counterbalancing a trend for lower value frozen broiler meat exports to outpace shipments of processed chicken.

Trade-wise, the Brazilian real has fallen 10% from its secular peak against the baht last year. The US dollar also appears poised to increase in value by 10% or more against the baht. With currency changes cheapening the cost of its chicken internationally, demand for Thai chicken can only grow.

Second tier exporters like Argentina, China and Turkey, which looked like they were catching up to Thailand in market share, have all suffered export crisis. Several years ago, China nearly equaled Thai broiler export volumes. Argentina and Turkey were enjoying aggressive shipment growth. They looked capable of overtaking Thailand in chicken exports.

Now they suddenly find themselves selling 20% to 50% less chicken than three to five years ago. –By comparison, Thailand's 2016 broiler meat shipments were 44% higher than they were in 2011, while its 2017 exports will be nearly 40% above 2012 levels.

Finally, shortly before this article went to publication, another piece of good news came Thailand's way: South Korea, which imports approximately 140,000 tonnes of chicken meat a year and which once sourced much of it from Thailand, is allowing its chicken back into its market for the first time since 2004.

This represents a breakthrough, as South Korea once absorbed a significant portion of Thailand's chicken meat exports. When combined with low Thai labour costs and lower shipping fees to Korea, the next few years could see Thailand regain its large market share in this important, growing north Asian market.

Chatchai Sarikulya, Thailand's minister of agriculture, believes that the opening of South Korea's market could boost 2017 exports by 3% or 20,000 tonnes in 2017 and by up to 40,000 tonnes within a year or two. If it does not suffer any setbacks in other major markets, it could make 2017 exports come closer to 750,000 tonnes rather than the current, USDA forecasted 730,000.

The announcement also coincided with the approval of twelve Thai chicken processing plants for export to South Korea including three facilities operated by CP, two by Betagro and US-based Cargill. Another 18 Thai chicken processing plants have applied for South Korean government approval and may receive permission to begin shipments by mid-2017.

All this means that after exceeding expectations for three years in a row, Thailand's broiler appears poised to enjoy yet another few years of aggressive, export-led growth. With the next supplier nation exporting approximately half as much chicken, Thailand is now the undisputed king of second tier poultry exporters.


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