High feed costs cause shifts in Brazilian poultry market

13-09-2012 | | |
High feed costs cause shifts in Brazilian poultry market

Price of chicken in Brazil is on the rise, as the huge hike in the price of feed works its way through. Per capita, domestic consumption is set to fall this year. Our correspondent in the country analyses the effects of the current turmoil in the poultry market of the largest exporter in the world.

By Patrick Knight
The virtual doubling of the price of soy meal and maize between them, is responsible for 70% of the cost of producing live birds, is the latest and probably most severe challenge faced by Brazil, the world’s third largest poultry industry and the largest exporter of poultry meat. To pay for more costly feed, the retail price will have to rise by about 40% in the next few weeks, say analysts (at end of July ’12). This will impact demand both in Brazil and in other countries. Up to 700,000 tonnes less meat may be produced this year as compared to 2011, a fall of 6%.
Photo caption:  Coopercentral Aurora is an example of an integrated chicken and pork processor that takes advantage of cheap feed in the central west. However, millions of tonnes of maize are trucked from the central west to the south west where the poultry is produced.

A severe drought in the south of Brazil, where two thirds of the 13 million tonnes of chicken produced each year is processed, cut nine million tonnes from the 2011/12 soybean crop. This, coupled with the recent dry weather in the United States, has caused the world price of soybeans to almost double and is encouraging record exports of the oilseed from Brazil. About 23 million tonnes of soybean meal is used each year as feed by the poultry, pork and dairy cattle industries in Brazil. But there are fears that record exports could cause soybean meal to run out in Brazil before the end of this year.

Record maize crop
The severe drought in the south and in the north east also cut the summer maize crop. But this has been more than compensated for by an all time record winter maize crop of 38 million tonnes, most of that grown in the centre west. As a result, a record 73 million tonnes of maize will be produced in Brazil this year.
In contrast, the driest weather for decades in the maize growing areas in the United States, has slashed up to 40 million tonnes from the maize crop there, causing prices to soar as a result. Up to 14 million tonnes of maize may be exported this year, as many countries including the United States as well as China, turn to Brazil for supplies. Despite the strong domestic demand for maize, farmers in the south plan to plant more soybeans than maize in the region for the 2012/13 summer crop later this year. This will mean up to three million tonnes less of the grain may be available in the south in 2013 than expected.
Call on government
The poultry and pork industries in the region already consume much more maize than is produced locally. Millions of tonnes have to be taken up to 1.500 km by truck from the centre west. Very little is still used there, despite a few integrated chicken and pork installations having been built in the region in recent years, which take advantage of cheap feed. Faced with this difficult situation, which will gradually worsen as the year progresses, the poultry industry has called on the government to take steps to prevent what it fears will be a 10% reduction in the output of chicken this year.
Farmers point out that the higher cost of meat is already pushing up inflation, which is always a sensitive issue in Brazil. The industry wants the government to ensure that farmers in the south do not plant less maize this year. As an incentive, up to $200 million is to be given to farmers who promise to plant maize, rather than soybean in the south.
Export struggle
Brazil’s poultry industry has had a difficult time in the past few years. To attract foreign investors, some of the world’s highest interest rates were available for several years, which resulted in the currency, the real, gaining 40% against the US dollar between 2005 and the middle of last year. To maintain revenues in local currency, in which most costs are incurred, the poultry processors raised the price of the meat they exported. The effect was that some ground was lost to exports from the United States and other producers, notably Thailand and Argentina.
Brazil exports a much higher proportion of high value breast meat than the United States, where all the breast meat produced is consumed locally. This has allowed Brazil to maintain its share in many markets, especially in Japan. Brazil has also been helped by the fact that it produces large quantities of one kg “griller” birds, favoured by consumers in the key Middle East market. To compensate for sluggish exports, demand for chicken in Brazil itself has been growing far faster than the rate at which the economy has grown. Wages and pensions have been increased, unemployment has fallen and access to credit made easier, while the strong Brazilian real meant imported goods were cheaper. The result was that demand for poultry meat and in particular higher value cuts and processed items, whose popularity has increased along with the increase in the number of women at work, helped compensate for weaker exports.
This positive phase has now come to an end. The real has fallen by 20% against the dollar and other currencies in the past 12 months, while the economy has started to slow. Many consumers built up large debts during the boom years, so are now cutting back on spending, worried that the good times are over for the present. Unfortunately, the weaker real has coincided with financial difficulties at many of Brazil’s customers for chicken. Japan, the leading destination as far as prices, if not volume is concerned. Demand has also fallen in EU countries, which pay the highest prices.
Until recently, Brazil always managed to find new markets, mainly countries such as Africa and Asia, as well as China, where sales are booming, to replace those in decline. So overall demand for chicken has grown steadily, be it more slowly than in the 1980s and 90s.Farmers producing day old chicks always tend to be optimistic and more chicks are frequently produced than the market can comfortably absorb. When stocks build up, as they did early this year, chicks have to be sacrificed, or live birds are sold at a lower weight than normal to save on the cost of feed.
Beef preference
Another problem for the poultry industry is that there is a surplus of beef in Brazil at the moment, so red meat is relatively cheap. Farmers were encouraged by high beef prices of recent years to hold onto cows and breed more calves. But costly Brazilian beef has been priced out of many markets, and exports have stagnated. Although more chicken than beef is now sold in Brazil, whenever possible Brazilians prefer beef. The relatively low cost of beef will make it difficult for chicken processors to increase prices by as much as is necessary.
Company shifts
The situation is further complicated by the fact that a major re-structuring of the industry has taken place in the past four years, since Sadia, which had made unwise hedging decisions, found itself having to pay more than $2 billion to banks in penalties As a result of this, the two major players, Sadia and Perdigao, were forced to merge to form Brasil Foods. Following concern by the Competition Commission (Cade) that Brasil Foods had a virtual monopoly for many high value processed products, the Marfrig company, which bought Seara (poultry and pork processing) from Cargill a few years ago, has taken control of some Sadia and Perdigao assets. These include further processing and packaging plants.
Following the decision by the troubled Doux company to leave Brazil, the JBS meat packing company, the world’s largest, has recently taken control of that company’s assets in Brazil. JBS, which a few years ago bought the Pilgrims Pride poultry company in the United States, has long wanted to get involved in processing poultry in Brazil, where the company is the largest processor of beef, and a leading producer of pork. JBS has been loaned several billion dollars by Brazil’s National Development Bank, which allowed it to embark on a buying spree overseas and consolidate in Brazil. Because of this, it seems that the government put pressure on JBS to assume control of Doux, rather than let the company be taken over by a foreign company such as Tyson, which has been rather low key in Brazil until now.