Industry Trend Analysis - Poultry Only Segment To See Growth - FEB 2014


BMI View: We have turned more positive in our outlook for 2013 and 2014 poultry production in the EU-28 , as the sector has benefited from strong regional and export demand growth. Indeed, poultry is less affected by periods of economic weakness, as it is cheaper and more convenient to cook. Over the long term, production growth will remain subdued as EU countries face competition from Thai and Brazilian exports. Still, the segment will outperform pork and beef, which will experience stagnation or negative growth over our forecast period.

We have turned more positive regarding poultry production in the EU-28 in 2013 and 2014, as the sector has benefited from strong regional and export demand growth. Poultry is less affected by periods of economic weakness, as it is cheaper and more convenient to cook. EU-28 production in 2013 is estimated to have increased thanks to higher broiler meat production in all major EU producing countries, including the UK, Benelux, Spain, Poland, Germany, Italy and France. In France, poultry production decreased in France in 2012 on the back of the demise of Doux, the largest French broiler producer. However, French output was expected to rebound in 2013 as competitors replace the company's lost market share.

We expect a very limited improvement in the EU-28 economic situation in 2014 (which favours cheap protein sources, leading to continued strong domestic demand for poultry meat). This, combined with continued export demand, leads us to project further expansion in EU-28 broiler production in 2013/14. We forecast output to reach 9.9mn tonnes in 2013/14.

Fairly Well Distributed
Select EU-28 Countries - Poultry Production (% of total regional production)

The poultry industry has fared the best in a context of high feed prices, as most poultry producers have managed to pass input cost increases to domestic consumers and therefore maintain margins at high levels. The sector could also be the largest beneficiary of the recent significant decrease in grain prices in the EU-28 since the spring of 2013, as it will result in increases in operating margins but also retail price decreases.

Retail Prices At Record
EU-28 Average - Monthly Average Prices For Whole Broilers (EUR/100kg)

Over the long term, we maintain that production growth will remain subdued, mainly because the union will have to face increasing competition from Thai and Brazilian exports. The opening of the EU-28 market to uncooked broiler meat from Thailand on July 1 2012 led to a significant increase of imports from Thailand, to the detriment of imports from Brazil. We believe EU-28 poultry producers are largely uncompetitive compared with Thai and Brazilian producers for several reasons. First, feed costs, which account for a significant share of broiler production, are 25-30% lower in Brazil and Thailand than in the EU-28 on average. Second, with slaughter and processing costs also lower, total production costs in the EU-28 are 30-40% higher than in Brazil and Thailand. Finally, poultry meat sold in the union is generally not competitive in terms of price, even after the payment of import duties. Strong differences remain among EU member countries, with broiler meat in France being 13% more expensive than in the Netherlands and Germany. The difference is even more significant compared with Poland. As a result, we expect Thai and Brazilian imports to surge in uncompetitive producers.

Divide And Rule
EU-28 - Broiler Imports By Country In 2013 (% of global)

Ultimately, we believe the union will increase its exportable surplus over our forecast period. We forecast the EU-28 production surplus for poultry to increase from 541,000 tonnes in 2013 to 819,000 tonnes in 2018. We see continuous strength in export growth to Saudi Arabia, which, because of high oil prices, allowed frozen whole bird exporters from EU countries to pass most of their higher production costs to foreign customers in 2013. Our forecast for steady oil prices over the coming years - as well as strong growth in Saudi private consumption and Saudi preference for higher quality products from the union - indicates that the EU-28 will continue to find strong prospects for its poultry exports in the country over the medium term. On the other hand, exports of low-priced cuts and mechanically deboned meat to Sub-Saharan Africa, especially South Africa and Ghana, will continue to grow. South Africa has now becoming one of the largest customer of EU-28 broiler meat, just behind Saudi Arabia momentarily. The EU-28 has benefited from the ongoing WTO challenge South Africa imposed on Brazil on accusation of dumping its poultry exports on the domestic market.

Net Exports To Increase
EU-28 - Net Broiler Meat Exports ('000 tonnes)

For beef and pork, we are much less optimistic about medium-term production prospects owing to a scarcity of animals, tighter quality regulations weighing on margins, and more subdued demand growth, both domestically and globally. For beef, we estimate production will recover slightly in 2013, but believe this is mainly because of base effects. In 2014, we forecast beef production to stagnate and to remain stable around 7.8mn tonnes over the rest of our forecast period. This will be a consequence of shrinking cattle herds in the EU-28 on the back of the phasing out of government support programmes and large live cattle exports to Turkey in 2011. Scarcity of animals can be illustrated by the rise in calf and slaughter cow prices in H113, and we believe the recent relief seen in prices was due to a moderation in grain prices rather than to signs of expansion in the herd.

Rise And Fall
Netherlands - Calf Heifers (EUR/head, LHS) & Slaughter Cattle Prices (EUR/kg)

Moreover, the recent horsemeat scandal and fears over labelling and quality in the beef production industry could boost governments' incentives to tighten standards, which will further constrain producers' margins and discourage production. That said, increased export demand could help to prevent a decline in the EU-28 beef industry. Indeed, the bloc has reopened trade with Russia and Japan after both countries banned meat products from Germany, Netherlands and France (Russia banned German imports and Japan banned Netherlands and France) on traceability issues. The Netherlands alone sees strong opportunities for the export of veal and estimates the Japanese market for Dutch veal at about US$40mn, about 4,000 tonnes per year. This would represent 1.5% of total beef and veal exports from the EU-28 annually.

Declining Feed Prices
S&P GSCI Grains Index (weekly)

For pork, we actually forecast production declines out to 2017/18, with production falling to 21.9mn tonnes by the end of our forecast period. First, sow stocks in the EU-28 had started to shrink in 2012 and 2013 as the new animal welfare regulations for sows were being enforced, and given high feed prices. The decline in sow stocks has been particularly significant in Poland, where the pork industry was too fragmented and inefficient to be competitive with the new standards, especially compared with Dutch, Danish and German suppliers of pork and piglets. Second, export growth potential for EU-28 pork will remain subdued outside of China, where we see fierce competition for market share between local producers supported by the government, and very efficient producers such as Brazil, Thailand and the US.

EU-28 Meat Production By Type ('000 tonnes) & Annual Growth Rates
2013 2014f 2015f 2016f 2017f 2018f
Poultry Production 9,750.0 9,900.0 9,999.0 10,049.0 10,099.2 10,149.7
% growth y-o-y 2.1 1.5 1.0 0.5 0.5 0.5
Poultry Consumption 9,208.1 9,234.4 9,258.4 9,282.4 9,306.5 9,330.7
% growth y-o-y 0.3 0.3 0.3 0.3 0.3 0.3
kg per capita 20.7 20.7 20.7 20.7 20.7 20.7
Pork Production 22,450.0 22,400.0 22,176.0 22,065.1 21,954.8 21,845.0
% growth y-o-y 1.6 -0.2 -1.0 -0.5 -0.5 -0.5
Pork Consumption 20,450.3 20,488.8 20,523.7 20,558.8 20,593.9 20,629.1
% growth y-o-y 0.1 0.2 0.2 0.2 0.2 0.2
kg per capita 45.9 45.9 45.9 45.9 45.8 45.8
Beef Production 7,690.0 7,700.0 7,777.0 7,769.2 7,761.5 7,753.7
% growth y-o-y 1.5 0.1 1.0 -0.1 -0.1 -0.1
Beef Consumption 7,771.7 7,782.2 7,791.9 7,801.5 7,811.1 7,820.8
% growth y-o-y 0.1 0.1 0.1 0.1 0.1 0.1
kg per capita 17.4 17.4 17.4 17.4 17.4 17.4
f = BMI forecast. Source: Eurostat, USDA, BMI