Market balance is crucial to poultry profits

Consumer demand for British chicken may have shown the first signs of slippage, but Rabobank analyst Nan-Dirk Mulder (pictured) believes the sector still has a positive outlook in 2014, if integrators resist the temptation to chase market share and create a surplus.

Those farmers that buy feed independently will already have seen some margin improvements from grain markets falling back, while others with linked feed-ratchet contracts should see some price improvement this year, he says.

It would appear that most UK integrators are also feeling optimistic, with many announcing an expansion of some form in the last six months.

According to the latest Rabobank Poultry Quarterly report, current market conditions are contributing to the best margins for producers in the western hemisphere in five years.

As such, a 0.6% expansion is projected in European poultrymeat output this year, and the report estimates this to broadly be in line with demand. “The industry should be able to benefit from favourable market conditions, with tight pork and beef markets and lower feed prices,” it says.

Despite this bullish outlook, threats abound in the form of supermarkets seeking to put pressure on their suppliers, which could in turn threaten any improved returns to farmers.

Buying British

“The challenge remains to keep markets balanced,” says Mr Mulder. “We currently see a trend to more ‘buy local’ initiatives, like buy British.” The same trend is taking place in other EU countries such as the Netherlands and Germany, he adds.

“This leads to production expansion in countries were these market changes happen. If other markets do not anticipate this trend, this could lead to a period of oversupply and more price competition.”

Poultry fits well for the supermarket buyer as a staple British foodstuff. It is produced year-round, is less affected by higher labour costs involved with red meat, and economies of scale can be attained with very little land.

As a result, the “big four” supermarkets – Asda, Morrisons, Sainsbury’s and Tesco – now source almost all of their fresh poultry from Britain, with Tesco notably pledging to only sell fresh British chicken in its stores.

The same trend is evident in smaller chains like the Cooperative and the discounter supermarkets.

Mr Mulder says that this demand for poultrymeat reared in Britain is crowding out exporters trying to sell chicken into the UK, adding there is concern that pressure on trade volumes will grow as UK producers’ expansion plans materialise.

Price pressure

Despite this growth in demand for British, a second threat to profits comes in the form of smaller supermarket chains sourcing 100% British for fresh chicken – and Mr Mulder believes discounters such as Aldi and Lidl, with lower shelf prices, are challenging processors to keep prices depressed.

The discounters operate in the same market as other supermarkets, but manage to sell British poultry at a lower price.

He explains that consumers, since the 2008 recession, have “traded down” from the main supermarkets to discounters, and from expensive cuts and types of meat to cheaper alternatives – such as chicken.

While this trend has generally been seen as a benefit to the poultry industry, established supermarkets have lost market share and have been forced to cut prices to compete.

European changes

Big changes to other markets are also going to affect the UK, particularly the Netherlands but also Germany, which have experienced growing demand for home-produced poultry for a different reason – animal welfare.

Both countries have witnessed protests that chicken is grown in inhumane conditions and too fast.

In the Netherlands, a slower grown chicken will now be produced separately for Dutch shops, splitting the domestic and export markets. And Germany is introducing “Initiative Tierwohl” – a scheme designed to guarantee a price premium for chicken produced to higher welfare standards.

Mr Mulder says these initiatives will “fundamentally” change those markets, which could have a knock-on effect on the British poultry scene.