Year’s end is worrying for chicken farming in Brazil

Chicken farming has a delicate scenario at the end of the year. Even in a period of strong demand, prices do not find support and continue falling. There is a latent difficulty in placing certain cuts on the market, such as breast cuts, with clear surpluses. The first problem was the expansion of the housing of breeder chicks during the second semester. Even with exports at a good level and with heated domestic demand, losses persisted in a large part of the country.

The picture became more difficult in the international market with the resumption of Ukrainian exports. Ukraine’s great advantage over Brazil is logistics, with a large supply capacity to the European continent at very low costs. In this regard, there was a decline in the average volume exported. Added to this, Chinese importers took a more aggressive position for renegotiation of contracts, as a result of a heavily devalued yuan amid the cut in the Chinese prime interest rate, going against the position of other economies.

Until a few weeks ago, the Chinese government still adopted a zero-tolerance health policy against COVID-19, closing entire provinces in cases of outbreaks of the disease. In the first half of the year, the closure of the province of Shanghai, where the largest container port in the world is located, caused disruptions in global logistics. The consequence of this very aggressive policy was the strangulation of economic activity in China, promoting atypical growth rates by Chinese standards.

Amid anemic economic growth, the Chinese government went against the grain of other economies and began to cut the prime interest rate. The aim was to make credit cheaper and encourage economic activity. Another aspect is that the cut in interest rates against the world led to the aggressive outflow of capital from the Chinese market, promoting a broad process of devaluation of the yuan against the dollar. The consequence was that many products exported by China became more internationally competitive, and electronic components, textiles, petrochemical products, among others, were widely exported.

However, this strategy generates negative consequences, the main one being the higher cost of imports. In this sense, Chinese importers began to vigorously renegotiate import contracts, including beef and chicken. Lowering dollar prices proved to be an important tool in the midst of the currency devaluation in China. As discussed in previous publications, this was one of the main reasons for the decline in the price of an arroba of fattened cattle in the Brazilian market. China is the largest consumer of agricultural and non-agricultural commodities on a global scale, therefore it has great power in terms of price formation.

 The contract renegotiation process occurs on a recurring basis. In 2021 and 2020, there were also movements in this direction by Chinese importers. This year, monetary policy served as a backdrop for this type of strategy. In 2023, China will continue absorbing huge volumes of animal protein, however, it must not repeat the numbers of 2022. This premise applies to volume and price.

The consumption pattern in 2022 pointed to the preference of a good part of the population for more accessible proteins. In this context, chicken and eggs were very prominent products in the daily lives of the population. In 2023, the big detail will be the increase in the beef supply, which must lead part of the population to return to this protein. That is, the advance in beef availability will affect the price formation of competing proteins.

In the field of exports, Brazil also took advantage of the advance of Avian Influenza in the northern hemisphere to expand its participation in the international market. The disease spreads quite strongly in Europe and North America. Even in South America there are outbreaks of the disease. MAPA, SEAPAS, associations and other entities operating in the sector began to redouble inspections to prevent the disease from reaching the country. These measures are necessary, however, the rigorous sanitary process involved in the slaughter of chickens in Brazil practically eliminates the risk of the disease reaching commercial farms. Cases can even be reported in wild animals but without posing a great risk from the perspective of the market.

For 2023, the expectation is that Brazil maintains the global leadership of chicken exports with some tranquility. The United States must even show advances in its production, but Avian Influenza limits this growth and makes North American production focus on meeting its robust domestic demand. Europe has a production decline amid the advance of the disease. Furthermore, there are no guarantees that Ukraine will remain on the international market, with a highly unpredictable conflict that has been going on for almost a year.

In this context, the trend is for Brazil to export around 4.8 mln tons of chicken next year, up 2.8% from the current year, in which the country must ship around 4 .68 mln head. Production must increase by around 1.2% compared to the current year, with production estimated at 14.54 mln tons, against 14.37 mln tons in the current year. As a result, internal availability will rise by 0.4%.

It is worth noting that costs remain high, generating a significant deterioration in the operating margin at the end of the year. Corn supply will again be challenging throughout the first half. The combination of increased costs, added to the cooling of domestic demand, leads to the need for production adjustments by cutting housing. This is the only viable alternative to keep the sector profitable. Otherwise, the losses will continue, as seen in the last quarter.

Tags: Ukraine, China, exports, Brazil, prices, chicken, Market, demand, breeder chicks