Poultry producers face tightening profit margins and rising feed costs

Poultry producers will have to cope with tightening profit margins and high feed costs, according to Rabobank’s quarterly poultry report.

The bank’s food and agribusiness research and advisory group is predicting that profitability swings will be an ongoing problem for the poultry industry globally, which saw similarly sharp increases in feed costs in 2008 and 2010.

In developed countries in particular, the industry lacks adequate power to pass on feed cost increases.

Key factors driving this adverse situation are oversupply, government restrictions regarding plant closures, fragmented industries, inflexible supply chains, and pricing models in the value chain.

Rabobank analyst Nan-Dirk Mulder said: “The first quarter of 2013 is likely to be challenging as higher feed input costs move through the flocks. Beyond that, returns will depend on industry discipline in keeping production sufficiently moderated to get prices higher and offset increasing costs. Weak global performance is urging industry players to rationalise supply base, and non-strategic vehicles are being divested.

“The most challenged poultry industries are currently in the US, the EU, Thailand, and South Africa, though companies in Russia and Brazil are performing relatively well.

“Thai production expansion in the last two years has been too fast to be in balance with current market demand. This has resulted in large oversupply in the domestic Thai market and declining revenues in concert with increased feed costs.”

The EU has seen a structural reduction in margins. Recent levels have fallen from historic averages of between 6% and 7% to between 4% and 5% and even temporarily lower during some of the spikes in compound feed prices that have been seen this year. In the US, there have even been negative EBITDA margins in the industry in times of high feed prices but current margins are slightly higher, although below its historic level.