Gordon Butland, has a long history in the poultry industry. Years ago, when he joined the Rabobank he showed his aff ection for the poultry industry. His advisory work made him travel frequently around the world meeting leading companies in the industry. The many presentations he gave during his stay with Rabobank and even since his retirement, helped a lot in understanding the actual situation in the global protein market. Therefore his presentation at the World Poultry Congress, at a time when many companies are suff ering from losses, was of interest to many. Butland started his presentation by pointing at the recent Rabobank-published paper, entitled “Crossroads for Growth – Outlook for the Global Meat Industry towards 2020”. With raw material costs continuing to rise at very high levels, partly due to biofuels and partly due to climatic problems, it is, according to Butland, not too dramatic to think about “Crossroads for Survival”. He said that in 2011, most poultry companies in the US incurred heavy losses, operating for 10 months of the year with negative gross margins. One owner recently stated that he had lost 40% of his net worth that had been built up over 60 years. In Brazil, with the exception of Brasil Foods, many of the smaller companies have struggled recently and there have been some high profile financial problems.
With the start of the ‘ethanol programme’ in 2006, the economic structure of the protein industry changed permanently with the price of corn increasing signifi cantly, Butland stated. Also more and more countries are adopting policies of alternative fuels that are affecting the soy complex also.
Even though there has been strong criticism of these energy policies from the meat industry and institutions such as the FAO, there has been no change in direction and seemingly no change is contemplated in the foreseeable future. Even with increased investment in research, viable alternative sources of materials still seem to be a distant dream. In 2007, Dr Paul Aho the respected American agricultural economist, who is very heavily involved in the protein industry, predicted that in times of normal harvests, corn prices although much higher than in “pre-ethanol” times, were still able to be absorbed by the industry and the consumer. However as soon as there were problems with supplies, Butland said, prices would rise to levels that would be diffi cult to manage.
Who pays the bill?
The fi rst supply problem occurred with a very poor wheat harvest in Europe in 2008. Large quantities of GMO free corn were purchased from Brazil with large premiums and suddenly corn was closing in on US$ 8 per bushel (US$ 310 per metric ton) causing heavy losses and was the main factor in the bankruptcy of Pilgrims Pride. The fi nancial crisis of 2008-2009 dampened demand for oil and meat and commodity prices went back to ‘normal’ and production levels increased again. The respite did, according to Butland, not last very long, a recovery in economic activity soon led to demand returning to previous levels and various harvest problems coupled with increased demand from China have again pushed up corn and soy prices past the highest levels.” The increased corn and soy price could, according to Butland, have been passed on to the consumer but the supermarkets had no incentive to increase prices, as supply of poultry was not an issue. A possible artifi cial demand was created as products were being sold well below their real economic level. When finally the USA reduced their production levels significantly, the price of breast meat increased by over 20% in late 2011 and the industry returned to a small profit in early 2012. However Brazil raised its 2012 an increase of 10% above 2011 levels, creating a new drama. No wonder that several companies decided to cut production, hoping to survive the new crisis.
Not only Rabobank looked at the future of the poultry industry. Also Tyson, the largest poultry producer in the world, recently revealed its expectations for the short-term future, said Butland. It tells that the protein availability per capita in the US has declined by 11% since 2006 and will likely continue to decrease. Meanwhile meat exports have continued to grow and this trend may stay. Tyson also foresees a lower global supply for protein while global demand, fuelled by developing countries, will increase. Within this picture Tyson expects the US to remain a low-cost producer. While the per capita consumption of protein in the US has gone down due to reaching the saturation level, the per capita consumption in Brazil has continued to rise and now stands at over 47 kilos per capita (about 140 grams a day). It is diffi cult to see this level increasing rapidly, Butland said. He warned the Brazilians not to grow like the Americans by becoming bigger and bigger in size and starting to suff er from obesity.
New model needed
The four main global exporters, Brazil, USA, EU and Thailand are all saying, according to Butland, that exports will continue to grow. In 2011, the EU led the growth ahead of both Brazil and the USA. This growth from the EU was partly fuelled by export refunds to the Middle East and Angola. Both the USA and Brazil are protesting strongly. Butland agrees that the developing economies will certainly be the drivers of increased trade but it is, according to him, doubtful if they will be able to aff ord the prices that the exporters need to have for a sustainable business. Tyson expects that grain volatility (i.e. high prices) will likely continue. The result will, according to Butland, be that balance sheets are getting weaker for many companies, to such an extent that banks are wary about increasing exposure, especially to smaller companies. This leads, so says Butland, to the conclusion that the existing model, that has basically been in place for 60 years, based on higher production/lower costs has been so successful that the reduction in unit costs from higher production volumes is not the solution any more.