December 24, 2015
America's broiler market cycle turns amid great uncertainty
An eFeedLink Hot Topic
•  Falling red meat prices caused consumption to grow more slowly than output in H2 2015
•  Currency exchange rates, bird flu outbreaks could upset 2016 production and trade forecasts
•  Broiler market share hits all-time low of 29%, could recover to 31% if all goes well
After four fat years, America's poultry sector is besieged with vanishing profitability, punishing exchange rate forecasts and possibly more bird flu outbreaks. All this coincides with a significant loss of export market share. From 35% in 2010 and 33% as recently as 2013, bird flu plunged America's share of world chicken meat exports to 29% in 2015. Assuming bird flu does not return, the USDA expects it to stabilize at 30% in 2016.

Falling profitability was induced by crashing hog and cattle prices, which by late 2015 had fallen by 55% and 33% respectively from their early year peaks. On one hand, live chicken prices had no choice but to follow them downwards, with the USDA reporting average prices falling approximately 30% by late 2015.
On the other hand, this price deflation has not yet worked entered the retail price chain. Partly because earlier, bird flu-induced shortages, as of December, retail chicken prices fell slightly less than 5% since the start of 2015. By comparison, retail beef and pork prices dropped by 27% and 32% respectively. This resulting substitution of red meat in place of chicken exerts downward pressure on prices --just in time for an oversupply situation to develop.
Up to mid-2015, bird flu threatened supplies, thereby supporting prices and profits. Producers responded by over expanding output  --just as bird flu tapered off and stopped killing chickens. Despite losses from bird flu, broiler meat production actually climbed 3.9%, from 17.30 million tonnes in 2014 to 17.97 million tonnes in 2015.
A steep 10% or 332,000 tonne drop in exports (from 3.312 to 2.990 million tonnes) was offset by a sharp 6.9%, 962,000 tonne rise in domestic consumption, from 14.03 million to just under 15 million tonnes. With high profits accelerating replenishment just in time for red meat prices to fall, inventories are climbing 12.3%. At 347,000 tonnes, they enter 2016 at their highest level since 2005's 413,000 tonnes --which also coincided with the passing of a highly profitable market peak.

To minimize their losses, integrators have started cutting back output. After rising at a 2% to 4% pace for most of the past two years, late 2015 saw the egg and chick placement running 1% below the pace of a year earlier, the first such negative showing in over three years.
Nevertheless, momentum from the first three expansionary quarters will result in a USDA estimated 2016 chicken meat output rise of 2.2% or 399,000 tonnes, totaling 18.365 million tonnes. Increases of 237,000 tonnes or 1.6% rise in domestic consumption and 7.7% or 231,000 tonne in exports (to 3.22 million tonnes) are also projected. The resulting demand rise exceeds 2016's expected supply increase by 69,000 tonnes. While profits will be thin, by mid-2016, demand should be visibly outpacing production growth. This should induce a partial price recovery and slightly higher returns in H2 2016.
But having said all that, America's broiler sector faces two sources of considerable uncertainty. First, despite the USDA declaring America free of bird flu in late November, outbreaks commonly occur late in the fourth quarter or early in the new year. Thus, new bird flu cases could emerge even as these words are being written. Should bird flu re-appear before the end of the first quarter of 2016, it could make irrelevant all the above production, consumption and (most especially) export forecasts.
Second, America's performance world poultry market standing is threatened by more than just bird flu. From US$0.60 just a few years ago, the Brazilian real currently trades at US$0.25. That is significantly than the US$0.40 level it was trading at in the early 2000s, when Brazil started grabbing a large chunk of America's 50%+ share of world exports.
With the US dollar poised to climb further on rising American interest rates, it would not be surprising if America's 2016 chicken meat exports came in several thousand tonnes below expectations. Should new bird flu outbreaks coincide with a rising US dollar, America's share of broiler meat exports could fall into the 26% to 28% range.
With luck, none of this will happen. With stability, the industry could see its production, consumption and broiler prices rise modestly, exports by a faster 8%, and its world poultry market share rise to 31%. Whatever the outcome, after four fat years, America's poultry sector is now contending with a cyclical downturn, strong macroeconomic headwinds and disease-driven uncertainty.

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