Brazilian Chicken Exports Take Flight After Scandal

Brazil dominates the world’s chicken exports with more than 40 percent of the total global trade coming from the country's farms. For that reason, a probe of corruption in poultry launched by their police sent shockwaves through the world's chicken importers. The interestingly-named “Weak Flesh” investigation uncovered convincing evidence that inspectors had accepted bribes to approve spoiled chicken meat for export. Tainted poultry can transmit the deadly salmonella bacteria, which poses a severe threat to children, pensioners, and others with compromised immune systems. Critical importers such as China, Saudi Arabia, the EU, and Japan issued trade restrictions in reaction to the findings, and export numbers crashed to near zero in mid-2017.

But the story didn’t end there. Reassured by the probe’s thoroughness and the important fact that it was domestically initiated and executed, the importers have returned. Brazil exported more chicken than ever in August 2017, according to their Ministry of Development, Industry, and Foreign Trade.

Assuming that corruption-related problems remain under control, the future of the huge Brazilian poultry industry seems stable and prosperous. Furthermore, compelling economics on both the demand and supply sides presage rapid expansion well into the next decade.

Background

Brazil entered the 21st century with a wealth of untapped natural resources. From 2000 to 2014, cultivated land grew from an already-impressive 2.6 M km2 to 2.8 M km2—the equivalent of adding a new state the size of Kansas. During the same time period, the land dedicated to soybean production almost doubled.

Brazil found itself with a mind-bogglingly large soybean crop when acreage expansion accompanied increasing yields due to mechanization and improving practices. However, the country’s infrastructure expansion (roads, rails, and ports) lagged well behind the growth of the crop size. Soybeans were stranded in the interior of Brazil, waiting for trucks, trains, and boats to arrive empty and take them to booming markets like China.

Rapid demand growth

As the world’s consumers become more prosperous, they generally demand more protein in their diets. As an economical source of animal protein, chickens will provide a significant fraction of that additional demand.

Global food demand is expected to rise by anywhere from 59 to 89 percent between 2005 and 2050. Meat consumption follows this trend as the world’s population increases and becomes wealthier. Global meat consumption is projected to climb from 41.3 kilograms per capita in 2015 to 45.3 kilograms per capita in 2030.

Beef is too expensive to be an option for many developing countries. Beef consumption is projected to rise only slightly from 10.1 kg per capita in 2015 to 10.6 kg in 2030.

Pork is a viable meat for countries such as China and Brazil, but in others its appeal is limited by price and religious objections. Fewer people as a percentage of the total will eat pork in 15 years with consumption dropping from 15.3 kg per capita in 2015 to 15.1 kg in 2030.

Chicken is the cheapest, most universally acceptable choice to meet the rising global demand for meat. For that reason, poultry consumption is expected to rise significantly. Alone among the major meats, poultry consumption is projected to soar from 13.8 kg in 2015 to 17.2 kg in 2030.

In addition to the preference and cost effects driving people to chicken and the increased protein rations of newly prosperous consumers, population growth will expand the size of the consumer pool. Experts expect the globe’s population to rise smoothly from about 7 billion today through 8 billion in 2025 to 9.1 billion in 2050. This increase multiplies with the expected income gains worldwide to give us the outline of a potentially grave food shortage.

Historically, overall demand growth has led to meat and protein demand growth. The global agricultural industry’s past experience can help determine if it is equipped to handle the soaring demand for meat in the next 30 years.

Meat production

After a few years, Brazil arrived at its answer to the stranded soybean problem. Instead of moving bulky, heavy, and cheap soybeans, the country’s farmers embarked on a radical program to feed the beans and corn to chickens. Then they exported the meat for significant savings in weight and volume. This made great sense in several ways: not only did chicken production minimize ocean freight expense, but it also jumped producers to the head of the queue for truck and rail space due to the meat’s much greater value per pound. They simply could afford to pay more than the bean farmers.

When truck, rail, and ocean freight capacities become binding constraints, priority goes to items with the greatest value density, or dollars/reals per kilogram. Broilers, or chickens raised for their meat, consume about 4.25 kg of feed in their 47-day lifespans, and they weigh around 2.6 kg at slaughter. Feed should have around 25 percent soybean meal or another protein source, with the rest carbohydrates like corn except for a small amount of fat. Marketable meat makes up about 70 percent of the chicken carcass by weight. So, instead of shipping 4.25 kg of meal and corn worth $730/tonne, Brazilian meat packers are shipping 1.8 kg of meat worth $1400/tonne. So the chicken wins both by taking up less space or weight and by being more valuable.

Currency effects

The Brazilian real plummeted from 1.5/dollar to 3/dollar in five years from 2011 to 2016. As a country’s currency drops in such a precipitous manner, exports become much more lucrative and imports become unaffordable. Items whose prices remained constant overseas effectively doubled in price within Brazil. From the perspective of international buyers, the costs of any Brazilian inputs like land, transportation, locally produced materials or supplies, and skilled or unskilled labor collapsed with the currency. All of these effects combined to sharply strengthen the competitive position of Brazil’s export industries, like agriculture.

Conclusion

Brazil’s poultry industry recovered from allegations of unsanitary practices partly because raising the chickens at the source of the feed confers an undeniable cost advantage. When you transport the meat instead of the feed, you save about 70 percent of the weight and get the same amount of final product. Costs in Brazil, with its depreciated real, also dictate that the market should prefer to maximize its use of Brazilian labor and resources. As the world grows in population and per-capita income, the demand for protein will rise too. Brazil, one of the world’s biggest and cheapest poultry growers, has very likely secured its place as a preeminent export producer by biting the corruption bullet earlier this year. If these circumstances continue, the industry’s future looks great.

This optimistic view will fail, however, if the country backslides on its commitment to trustworthy food safety monitoring. Good faith mistakes or accidents will meet with tolerance, but a return to corrupt practices may lead to lasting damage. Furthermore, a huge rally in Brazilian Real prices could render the country uncompetitive in export markets. A change in world population or income growth could mean that Brazil has built too much production capacity for demand. A huge increase in freight rates could constrict international trade in favor of local production.

But those concerns are just hypothetical caveats. If current conditions persist, poultry producers should thrive. In the years to come, the world’s consumers can expect to find a Brazilian chicken in, if not every pot, many of them.