Global Poultry Competition Thomas E. Elam, PhD President, FarmEcon.com Carmel, IN USA www.farmecon.com thomaselam@farmecon.com March, 2007 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Global Broiler Meat Production Increases Global economic growth – more middle income consumers Increasing urbanization – more meat for city dwellers Growth slowed only slightly by HPAI Efficient, low cost, production systems make broiler meat affordable in even developing countries Leadership in marketing/branding efforts Broiler meat often viewed as healthier than beef or pigmeat Lack of religious/cultural barriers to consumption Improved international transportation infrastructure for fresh and frozen meats Increasing international broiler meat trade has made low price products available to more people FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Sources of Daily Calories in Human Diets 4000 3500 Other Animal Products Meats 3000 2500 2000 Other Crops 1500 Grain 1000 500 0 Bangladesh Source: FAO Philippines Japan U.S. FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Production Growth Drivers Income and population together drive global total meat demand, and demand growth Population growth is slowing, but still significant 6.5 billion today growing to 7.9 in 2025 (UN proj.) That’s still a 28% increase in mouths to feed Income growth is also significant 2004 -$5,800 global average per capita GDP ($1995) Will grow to about $7,300 by 2025 Demand growth drives production growth 1:1 (if prices do not change significantly) FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Income Drives Production * Global GGDP FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Global Meat Demand Growth FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Poultry Gaining Share FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Global Broiler Production 80,000,000 70,000,000 60,000,000 Tons 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 1970 Source: FAO 1975 1980 1985 1990 1995 2000 2005 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Some Strategic Advantages of the Broiler Company Low cost/kg meat produced Consistency of production over time Short production cycles Ability to adjust quickly to market demand Flexible processing operations Focus on end consumer Willingness to innovate FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Stages of Broiler Company Development 1) 2) 3) 4) 5) 6) 7) 8) Independent producers Feed company/producer/slaughter integration Add cut-up products Add genetics source (now fully integrated) Add further processing Add foodservice Diversify into other meats Next? International diversification 14,000 12,000 10,000 8,000 6,000 4,000 Cut-up, Branding, Genetics, Nutrition, Animal Health, Plant Automation Production, 000 MT Passed Pork Exports, 000 MT ????????????? Export Markets, HAACP, Buffalo Wings Fast Food/Deli Products, Recipes, Nutrition Image vs. Beef/Pork De-boning, Further Processing, Portion Control, Ionophores, Consolidation 2,000 Specialty Breeds, Vertical Integration Housing, Lighting, Antibiotics FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Growth and Selected Innovation in the U. S. Broiler Industry 16,000 Passed Beef 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Innovation Leads to Change in Product Form 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1965 1970 1975 Whole 1980 Cut-Up 1985 1990 1995 Further Processed 2000 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Broiler Innovation Trends Early innovation: internally focused, cost driven Vertical integration Live production efficiency Slaughter and basic processing Branding Later innovation: customer focused, value driven “Meal solutions” Product form Market research Product image FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Vertical Integration is Important Because: Consumers can relate brand name to quality Need to coordinate marketing opportunities with live broiler production for maximum efficiency Focus of entire organization on end-consumer Efficient direction of genetics/feed programs Critical mass for product experimentation Critical mass for penetration into the food service sector Builds brand loyalty and stabilizes prices FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Middle East Chicken Production Trends 3,500,000 Algeria Metric Tons 3,000,000 Egypt Iran 2,500,000 Iraq Jordan 2,000,000 Kuwait Lebanon Oman 1,500,000 Qatar 1,000,000 Saudi Arabia Syria UAE Yemen 500,000 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Source: FAO 1990 0 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Middle East Broiler Trends Despite regional problems, regional broiler production trend is solidly upwards Imports are growing, but not nearly as fast as production Consumption on a steady up trend, will continue to grow FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Global Meat Export Trends Broilers Show Steady Growth 30,000 20,000 Pigmeat Beef Broilers 15,000 10,000 04 02 00 98 96 94 0 92 5,000 90 000 Tons 25,000 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Global Top 10 Integrated Broiler Company Placements Pilgrim's Pride Tyson Perdue Sadia Bacchco Sanderson Farms Wayne Doux Perdigao Mountaire 0 25 50 75 100 125 150 Average Monthly Placements 175 200 18 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Top 10 Producers That Account for 77% of U.S. Production Pilgrim's Tyson Perdue Wayne Sanderson Mountaire Raeford Keystone Koch Foster 0 25 50 75 100 125 150 175 200 Average Monthly Placements (2006) Source: Poultry USA 19 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Consolidation of U.S. Broiler Companies 2006 % Share of 735 Million Lbs/Week 1996 % Share of 574 Million Lbs/Week 7.5 15.5 16.0 39.0 53.0 18.5 14.0 9.5 1-3 Source: Poultry USA 4-5 17.0 6-10 11-20 Others 1-3 4-5 11.0 6-10 11-20 Others FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Top 10 Broiler Producers Account for 52% of Brazil’s Production Sadia Perdigao Seara Avipal DouxFrangosul DaGranja Copacol Penabranca Diplomata Aurora 0 5 10 15 % of Production (2005) Source: Poultry USA 21 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Top 10 Broiler Producers Account for 25% of EU-25 Production Doux - France LDC - France AIA - Italy Grampian - UK Wiesenhof - Germany Gastronome - France 2 Sisters - UK Plikon Royale - Neth. Amadori - Italy Unicopa - France 0 1 2 3 4 5 % of Production (2005) Source: Poultry USA 22 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President 2007 Outlook AI in 2006 depressed output growth to lowest level in 20 years 2007 global poultry output growth of 2.5 million tons to 85.5 million tons Increase expected to be shared between developed and developing countries India will remain fastest growing market Brazil projected to expand output by 5% Prices expected to recover, but not to pre-AI levels FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Conclusions: 9 Broiler meat production has become a concentrated industrial and marketing enterprise in many countries 9 Brand identification (Integrator or Supermarket) has proceeded farther than with pigmeat or beef 9 Further-processing and meeting targeted consumer needs is key to future growth and company profitability 9 Global future for both production and trade growth is very bright 9 The age of the multinational broiler producer is dawning (CP, Tyson, Pilgrim’s, EU companies) Global Broiler Meat Competition and Trade FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Why is Trade Increasing? Increasing incomes help drive trade increases Improving trade climate On a technical level many countries perform about the same But on a cost basis, there are incredible differences Feed, labor, and capital costs vary tremendously Also, broiler parts are priced based on local demand (U.S. broiler/turkey dark meat) So, ample incentives exist to trade FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Meat Trade and Income FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President World Competitiveness Comparison-Plant Labor Costs 20 15 10 Source: Rabobank Brazil Indonesia* India* China* Africa* Thailand Russia Middle East Mexico E. Europe Argentina U.S. Canada 0 Japan 5 W. Europe U.S. Cents/Kilo 25 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Source: Rabobank Brazil Argentina U.S. Mexico E. Europe Indonesia Thailand China Russia Japan Canada W. Europe Other Asia India Middle East Other LA 50 45 40 35 30 25 20 15 10 5 0 Africa U.S. Cents/Kilo Liveweight World Competitiveness Comparison-Feed Costs (2004) FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President World Competitiveness Comparison-Total Costs (2004) 120 100 80 60 40 Source: Rabobank Brazil U.S. Argentina Mexico Thailand China Indonesia E. Europe Russia Other Asia India W. Europe Africa Other LA Middle East 0 Canada 20 Japan U.S. Cents/Kilo RTC 140 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Source: Rabobank Brazil U.S. Argentina Mexico Thailand China Indonesia E. Europe Russia Other Asia India W. Europe Africa Other LA Middle East Canada 90 80 70 60 50 40 30 20 10 0 Japan U.S. Cents/Kilo LW World Competitiveness Comparison-Total Costs (2004) FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President World Competitiveness Comparison-Total Costs (2007) 100 80 60 40 Source: FarmEcon.com Brazil U.S. Argentina Mexico Thailand China Indonesia E. Europe Russia Other Asia India W. Europe Africa Other LA Middle East 0 Canada 20 Japan U.S. Cents/Kilo LW 120 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Average Cost for Producing 1 kg of Live Weight Chicken in NAMA*, 2006 Item $/kg •Feed 0.70 •Labor 0.03 •Others 0.15 •Water medication 0.05 •Chick 0.20 •Anticoccidials 0.01 Total 1.14 others 13% anticoccidials 1% water medication 4% labor 3% chick price 18% Feed 61% Assumptions: •Feed consumed 2 kg at $ 350/ton •Other costs: utilities, transportation, maintenance & repair, misc •Water medication: AB + vitamins + vaccines •Chick: cost $ 0.40 per broiler gives a 2 kg bird; for 1 kg live weight, cost is $ 0.20 *N. Africa, Middle East FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Who Is Importing Broiler Meat? 2006 Broiler Imports – Top-10 Countries (High Cost) 1,400 000 Tons 1,200 1,000 800 600 400 Romania UAE South Africa Hong Kong China Mexico EU-25 Saudi Arabia Source: USDA Japan 0 Russia 200 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Who Is Exporting Broiler Meat? 2006 Broiler Exports – Top-10 Countries Low Cost Producers Dominate 2,500 000 Tons 2,000 1,500 1,000 Saudi Arabia Australia Kuwait Canada Thailand China EU-25 Argentina Source: USDA United States 0 Brazil 500 FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Role of Exchange Rates Much of Brazil’s competitive strength since 2000 is due to the weak Real Lowers the $ price of Brazil’s exports Brazil is self-sufficient in feed, rates do not affect Real costs Major reason for the explosion in Brazil broiler (and other meat) exports This advantage is declining as the Real strengthens FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President $0.800 3.5 $0.700 3.0 $0.600 2.5 $0.500 2.0 $0.400 1.5 $0.300 1.0 $0.200 0.5 $0.100 0.0 $- Real/$ Rate Broiler LW cost of R1.20/kg in $ $ Cost of R1.20/kg LW Broiler 4.0 Ja n M -00 ay Se -00 pJa 00 n M -01 ay Se -01 pJa 01 n M -02 ay Se -02 pJa 02 n M -03 ay Se -03 pJa 03 n M -04 ay Se -04 pJa 04 n M -05 ay Se -05 pJa 05 n M -06 ay Se -06 pJa 06 n07 Real/$ Rate Real-$ Rate and $ Value of R1.20/kg Broiler Production Cost FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Conclusions - Trade 9 WTO has opened new opportunities, but countries continue to erect new barriers 9 Export trade has become intensely price competitive 9 Exchange rates are critical to export competitiveness 9 Parts pricing critical to trade flows 9 Russian import business is unreliable, but huge 9 Exports are highly concentrated - U.S. and Brazil are the only two major players 9 French have become more focused on EU, exports declining 9 Export market is more than just meat FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Conclusions - Global Competition Level of technical production efficiency is equal in many countries Hatchability = 85% FCR = 1.85:1 to 2.00:1 Days to 2 kg. = 35-42 Death losses post-hatching 5-6% Major differences in cost are based on: 1. 2. 3. 4. Feed cost/ton Processing efficiency and labor costs (integration) Marketing, infrastructure, and company strength Scale of operation FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Conclusions: Future of the Global Broiler Industry Rapid global production growth of 3-4% p.a. will continue Asian growth has resumed, but slowed by HPAI Eastern European poultry production on a solid up trend after years of decline Vertically integrated production/marketing systems will grow in importance everywhere Global trade in poultry will continue to grow Further improvements in ADG/FCR will be very slow Competition, local and international, will focus on price, marketing, branding and product differentiation FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Who will supply the growth? U.S. has a cost advantage and sophisticated further processing, weak on differentiation Brazil has very low costs and good processing China has not developed processing, appears uninterested in exports, HPAI appears to be a long term problem Thailand has reached the limit of its domestic grain supply, further growth will be difficult, HPAI not going away soon FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Other Major Trends Increased processing automation Genetics focus on disease resistance Poultry will continue to gain share of total meat production Increased global concentration Feed costs likely to remain high FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President A future for the Middle East? Production can continue to grow 3-5% per year Production costs will remain high compared to Europe and the Americas More pressure to increase imports from low cost countries Efficient production is one key to survival Substantial changes in industry organization are probable – integration and consolidation Global Egg Market FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Global Production Trends Production is increasing in developing countries Developed country production is increasing, but <1%/year Intense pressure to change production practices in developed world Eliminate cages (cost = 5.7 billion Euro in EU-25) Eliminate production aids (antibiotics) Would increase costs by 10-20% Production is consolidating in developed world FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Global Trade Trends Very little trade in shell eggs Much of the existing trade is intra-EU Liquid/dry egg products trade is almost non-existent Low cost producers dominate the small global export market Little reason for positive growth outlook FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President 60% 500,000,000 50% 400,000,000 40% 300,000,000 30% 200,000,000 20% 100,000,000 10% Production, Tons and Share Po la nd et he rla nd s N Fr an ce Br az il us si a R Ja pa n ex ic o M In di a U .S . 0% hi na 0 Global Share 600,000,000 C Production, Tons Top 10 Global Egg Producers FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President U.S. Egg Production Costs, 2006 Item Feed Costs, $/Ton Pullet Cost, $/Bird/Year Feed Conversion Lb/Doz Feed Costs, Cents/Doz Pullet Cost, Cents/Doz Building & Equip. Cost, Cents/Doz Interest, Cents/Doz Misc. Costs, Cents/Doz Total Costs, Cents/Doz Assumes 34 dozen eggs/hen/year Source: UC Davis Amount $152.56 $2.35 3.45 23.87 6.93 2.90 1.80 5.00 43.49 Cost % 55% 16% 7% 4% 11% 100% FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Top 10 Producers Account for 48.6% of U.S. Egg Production Company Mill. Layers Share Cal-Maine 22.8 9.0% Rose Acres 20.5 8.1% Moark 14.2 5.6% Michael Foods 14 5.5% Sparboe 12.5 4.9% Decoster 10.5 4.2% Golden Oval 7.4 2.9% Ohio Fresh 7 2.8% ISE America 6.9 2.7% Dutchland 6.9 2.7% Total U.S. 252.6 Source: Poultry USA FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Egg Market Challenges Lack of market demand growth and product innovation Image and health issues Eggs sold fresh, no further processing Undifferentiated commodity Difficult to extract value from brands No frozen buffer stocks Volatile prices Color and raising systems are available to all Therefore, difficult to prevent cost becoming the basis of profit FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Egg Outlook Increased feed costs may reduce production growth rates Developing countries will continue to lead growth Likely to see sharply higher costs in Europe Pressures for consolidation are intensifying, especially in U.S. and EU Corn and Ethanol FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Ethanol Facts 1 bushel corn = 2.7-2.8 gallons ethanol + 17-18 pounds of DDGS U.S. ethanol production currently 5 bgy 2007 production will be 6+ bg “Official” goal is 7.5 bgy by 2012 (10 bgy more likely) If all Iowa planned plants are built and operational Iowa will need to import corn Ethanol subsidy of $0.51/gallon is important to corn prices Subsidy is about $1.40 per bushel ($55/ton) of corn FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Corn Value to Ethanol Producers: Effect of Ethanol Subsidy on Corn Price FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President U.S. Ethanol Production and Corn Use Trends FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Ethanol Projections Demand limited in short run by distribution and blending capacity Long run limitation is feedstock supply Demand is unlimited in the long run E85 could use 500+ million acres of corn Production goal is 7.5 bgy by 2012 Will likely get there by 2009 Forecasts of 10-12 bgy by 2010-2012 Crude oil price and ethanol subsidy level could set corn prices Use of cellulose is only long term solution, but also has many issues and limitations FarmEcon.Com A source of information on global farming and food systems Thomas E. Elam, PhD President Next Round of Effects U.S. corn acreage will increase in 2007 Corn/soy price ratio strongly favors corn 8-10 million acre increase possible Substantial reduction in soybean acres More corn acres are not a long term solution Major effect on global grain prices Increasing use of DDGS in feeds Long term advantage for Latin American corn and soybean producers