Outlook 2016: Profit margins still encouraging for poultry

Poultry farming is set to build on its recent successes, according to the latest Andersons Outlook report for 2016.

Egg and poultrymeat production are the unheralded success stories of British agriculture and, with weakness in the feed market set to continue, short- and medium-term prospects remain positive.

“Poultry farming often seems to have a low profile in UK agriculture,” says analyst Blaise TerHaar of farm business consultants Andersons. “But, despite being unheralded, both egg and meat production have seen strong output growth over the past couple of decades, especially since 2008.”

Among the reasons for this is that both products provide a cheap source of protein and are versatile ingredients in consumers’ diets.

“It is no coincidence that consumption took off at the same time that the financial crisis hit, bringing with it a squeeze in household incomes,” says Mr TerHaar. “The cost of chicken has risen far less than the rate of inflation (and other meats), meaning the product has actually become cheaper in real terms over the last two decades (see graph).

“Technical innovation and increased efficiency in the sector have allowed prices to be kept low.”

Feed costs

Of course, simply producing more is no benefit unless some profit is being made and the key relationship here is between producer price and feed cost, he adds. 

The Andersons report notes that the combinable crop sector is moving into a third season without any significant event which might lead to a price increase ex-farm, not helped by exchange rates, particularly the relationship between sterling and the euro. 

“Producers may well have to live with ex-farm feed wheat prices for 2016 and 2017 in the region of £120/t to £125/t,” says the report. “It was not so long ago that many were preparing their business plans on the basis of a price of between £140/t and £150/t.”

Price wars

The other side of the equation is the price of chicken and eggs, which have both been caught up in the ongoing price war between retailers.

“The big four supermarkets have been looking to fight back against the discounters by being more aggressive on price,” says Mr TerHaar. “But the discounters tend to have leaner operations – fewer product lines, smaller and more basic stores – and it is not always easy for the traditional supermarkets to replicate their cost structures.”

As a result, the big four are looking for the whole supply chain to help “invest in margins” – in other words, reduce prices. As the graph shows, poultry prices have been sliding in recent months, and 2016 is unlikely to see any let up.

Another concern in the broiler sector is that the focus at consumer level is very much on breast meat. The industry is facing increasing problems in securing worthwhile markets for dark meat – not helped by trade bans in the wake of avian influenza outbreaks. “This issue is one that needs to be addressed, perhaps involving the education of consumers,” says Mr TerHaar. 

Egg market

The egg sector will also face challenges in the year ahead. Even though market conditions have been relatively bright up to now, retailer pressure is still in evidence.

Furthermore, the strong demand for eggs and good returns have encouraged more output, and chick placing statistics indicate extra production is likely in the coming months. “This could well see prices weaken, though the industry has proven itself to be innovative and responsive to markets in the past, and there is no reason to think that will change.”

General economic prospects

After a number of years of economic downturn followed by a sluggish recovery, the UK economy is back in growth. “This is good news for agriculture as it offers a wealthier marketplace to sell to, but also brings challenges in the form of a stronger sterling and possible bank base rate increases,” says Andersons’ consultant Graham Redman.

A compilation of independent forecasts puts UK growth at 2.6% for 2015 and 2.4% for 2016. The UK economy is now back to the size it was in 2007, before the global economic turmoil. Yet, while on the surface, domestic outlook seems positive and healthy, the global economy remains fragile.

China in particular is struggling from high inflation, an ageing population and over-capacity. The eurozone too has been sluggish – despite the drop in energy prices.

“As the UK has outperformed Europe, there has been a shift in the euro/sterling relationship,” says Mr Redman. “And a strong pound disadvantages exports to Europe, the destination for over 75% of all exported agricultural produce. We do not forecast a swift return to a weak pound in the short or medium term. Our average projections for 2016 have assumed an exchange rate of €1 to 75p.”

Andersons also believes that borrowing costs will rise. “Whilst inflation is still low, this has been largely kept down by falling energy prices. The effect of this will start to unwind in 2016 and policymakers will be looking to make sure that the economy does not overheat. Rising borrowing costs might hurt some farmers.”