Poultry producers face economic hard times

The financial outlook for the UK economy is dominated by austerity, and poultry producers too are facing some economic hard times. Greg Ricketts of farm business consultants Andersons takes a look back and a look forward

All poultry producers have had a keen eye on feed prices recently, and egg producers have faced the double whammy of rising feed costs and falling output prices.

Feed costs fell during the early part of 2010 and by June the average compound price reached approximately £202/t. Since the summer, prices have risen by about £40/t, with the prospect of further increases to come over the next few months.

Nearly 60% of the cost of producing either meat or eggs in poultry systems relates to feed. Of that about 60% to 65% of the diet is made up of wheat. Therefore cereal prices have a massive impact on the unit cost of production for both poultrymeat and eggs. For every £10/t increase in the value of wheat, about 2.35p per bird is added to the cost of production for broiler chickens. For eggs, the increase in costs is approximately 1.1 to 1.2 pence per dozen, depending on the system.

As costs have risen, chicken meat prices have remained relatively static. Egg prices however have been under pressure for much of the year, due to increasing production, particularly from new free-range units. These have been built in anticipation of the EU ban on conventional laying cages to come into force at the end of 2012. This will see many older caged units cease production, but it is likely that production levels will only really decline as we approach mid-2011, as these older caged systems cease to be restocked.

Laying cages accounted for approximately 58% of production in 2008, but this has been falling steadily. The big uncertainty relates to the number of producers investing in enriched caged systems, which will comply with the forthcoming legislation. In the short term at least, a combination of new free-range production and existing cage eggs has created an over-supply situation with consequences for prices.

Egg producers have been squeezed at both ends with a drop in margin estimated at 18 to 22 pence per dozen. This appears to have been recognised by packers, some of whom have been raising the price of eggs since the autumn. Perhaps the strength for poultrymeat and egg producers is a relatively short production cycle compared with other livestock enterprises.

Given the high proportion of poultry production costs accounted for by wheat, it would not be surprising to see some correlation between poultry output prices and wheat values. As the graph shows, there did seem to be a relationship between January 2000 and January 2008. Lately, however, the two indicators seem to diverge, as wheat prices fell away in mid- to late 2008, while average farm gate egg price remained at above 70p per dozen until January 2010. Egg prices have since fallen dramatically, while cereals prices have moved in the opposite direction.

So what are the prospects for the future? Wheat futures remain strong for harvest 2011 and 2012, although the London futures market, LIFFE, indicates a fall in forward prices of about £30/t compared to current feed wheat prices of £188/t delivered. Feed costs are therefore likely to remain high, although prices could ease down from the peak expected during Winter/Spring 2011.

While broiler producers have generated positive margins over recent months, current sale prices are insufficient to offset recent feed cost increases, estimated at 9.4 pence per bird. With all egg producers showing a deficit after costs, before factoring in the full effect of feed price inflation, one has to suspect that output prices will lift in the near future.

Industry experts appear to agree that the market fundamentals remain sound, based on strong consumer demand for poultrymeat and eggs. Furthermore, egg production in particular will move into better balance with demand sometime during 2011, as older caged units become obsolete.

• The above article is derived from the 2011 Andersons Outlook report for British agriculture. Full copies of the report can be downloaded from www.theandersonscentre.co.uk/Free_Downloads.asp

Andersons seminars

Andersons is running a series of seminars in March looking in greater detail at many of the issues affecting agriculture covered in Outlook 2011. There is a choice of thirteen locations:

• Newark Showground, Nottinghamshire, 2 March

• Saxham Business Park, Suffolk, 3 March

• Thainstone Centre, Aberdeenshire, 4 March

• Worcester RFU, Worcestershire, 9 March

• Exeter Racecourse, Devon, 10 March

• Salisbury Racecourse, Wiltshire, 11 March

• National Agricultural Centre, Warwickshire, 14 March

• Westmorland Showground, Cumbria, 15 March

• Royal Highland Showground, Edinburgh, 16 March

• Askam Bryan College, Yorkshire, 17 March

• East of England Showground, Cambridgeshire, 21 March

• Harper Adams College, Shropshire, 22 March

• RAF Club, London, 24 March

The cost of the half-day seminar, including lunch, is £124 plus VAT. For more details call 01664 503200, or go to www.theandersonscentre.co.uk/seminars.asp