December 27, 2016

Brazilian broilers leverage China for good luck in a bad year



An eFeedLInk Hot Topic


  • High corn costs, low poultry prices challenged integrators in H1 but falling feed costs, higher selling prices made H2 2016 far more profitable
  • China's large 66%+ rise in Brazilian chicken imports turned an otherwise flat trade performance into a 7.8% gain to a record 4.11 million tonnes
  • With China boosting the number of factories approved for export from 29 to 40 and new markets such as Malaysia, Pakistan and Myanmar opening up, 2017 will be another record year for exports

The past year went better than expected for Brazilian broiler farms and the next year is expected to be even better. Initially, from late 2015 to H1 2016, an unexpectedly small corn harvest and too many corn exports created a feed corn shortage and very high, unBrazilian input costs. This was initially expected to keep broiler meat output to a 2.5% increase, from 2015's 13.146 million tonnes to 13.48 million in 2016.


The domestic corn shortage coincided with a 60% devaluation of Brazil's real over two years. This made imports costly at a time when domestic shortages jacked up Brazilian corn's price by 88%. Rising as high as US$6.40/bushel at one point, it was 70% above international prices. Squeezed between abnormally high production costs and low recession time broiler prices, many producers ran net losses in the first half of 2016.


Fortunately for them, the second half of the year saw exceptionally high export demand coincide with a recovery in domestic consumption. The latter occurred after a quarter of falling broiler meat output. This boosted live chicken prices even as the feed corn shortage abated and input costs fell, thereby restoring the industry to profitability.


On one hand, domestic prices of whole chickens closed 2016 35% above their mid-year lows; those of other parts were up anywhere from 30% to 40%. On the other hand, fluctuating world currency rates kept Brazilian chicken cheap overseas. Rabobank's Q4 Poultry Quarterly reports that the price in Euros for Brazilian whole chickens fell 3% during 2016 while chicken breast meat fell 4%.


Similarly, the cost of chicken feet exported to China rose 5% at a time when a rising dollar made the cost of US chicken feet purchased by China increase by 15%. With the cost of Brazilian chicken falling relative to its Thai and US competition, exports performed better than was expected.


Thus, estimates were steadily revised upwards and 2016 chicken meat output is now estimated by the USDA to have risen a healthy 4%, to 13.67 million tonnes. Nor do the industry's buoyant fundamentals end there. With the domestic economy rebounding and trade prospects continuing to improve, 2017 is expected to see broiler meat production to rise 3.5%, to a record 14.08 million tonnes.


After several years of recessionary economic conditions, domestic chicken consumption is projected to grow by 2%, to 9.7 million tonnes. This is the first time in several years that it has grown by at least 2% and outpaced population growth.


Exports to China have gone from virtually nothing at the turn of the decade to the second largest export market after Saudi Arabia. In fact, it was China that saved the day for Brazil's broiler sector.


On one hand, due to falling oil prices, Saudi Arabia, it largest overseas customer, bought 610,000 tonnes of Brazilian chicken in the first three quarters of 2016, 1.5% or 9,000 tonnes fewer than in the first nine months of 2015. Similarly, the 350,000 tonnes of total chicken exported to the United Arab Emirates and Kuwait was virtually unchanged from a year earlier. Similarly, the 300,000 tonnes of chicken exported to the EU and 315,000 shipped to Japan were also flat compared to the previous year.


With its exports to the rest of the world staying nearly flat, January to October shipments of Brazilian chicken to China skyrocketed 66%, from 150,000 tonnes in 2015 to 415,000 tonnes in 2016. In all, China is responsible for approximately 210,000 tonnes of this year's USDA estimated 269,000 tonne increase in Brazilian chicken meat exports.


While the longterm relationship with China is bright, there was a short term irritant: Due to inadequate and incorrect documentation, five Brazilian processing plants had their exports to China suspended in October. Going forward however, these plants are expected to resume shipments within months, once they get their customs documentation in order.


In fact, from 29 plants in early 2016, the number of Brazilian poultry processing plants approved for exporting to China should total 40 by the end of H1 2017. It implies Brazilian broiler meat exports to China of at least 350,000 tonnes and possibly as high as 400,000 tonnes.


In fact, one may note a certain oddity in this trading relationship: Brazil overtook China as the number two world broiler producer two years ago: Since doing so, nearly 15% of the 2 million extra tonnes of broilers Brazil produces more than China every year get exported to the latter.


Going forward, a sharp fall in the real's value after the US elections, should boost Brazilian chicken's price competitiveness against its US and Thai competition. This is especially true China, whose own currency has fallen nearly 15% against the dollar since 2015 and 5% over the past three months.


At the same time, Pakistan, Myanmar and Malaysia all recently opened their markets to Brazilian chicken and are expected to boost exports by at least 50,000 tonnes in


With domestic consumption rising 2%, exports by 7.8% and feed costs falling towards normal levels, the resulting 3% higher chicken meat output will enjoy significantly wider profit margins than it did in 2016. In conclusion, thanks to China, Brazilian broiler integrators got through a difficult year relatively unscathed, and have a better year ahead of them.
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