Poultry Quarterly Q2 2018

Transcription

1 March 2018 Poultry Quarterly Q A Massive Global Poultry Trade Shake-Up? RaboResearch Food & Agribusiness far.rabobank.com Published by the Global Animal Protein Sector Team Lead author Contents Global outlook Dashboard 5 US 6 Mexico 6 Brazil 7 EU 7 Russia 8 South Africa 8 India 9 China 9 Japan 10 Thailand 10 Indonesia 11 Nan-Dirk Mulder Senior Analyst Animal Protein Globally, most industries are performing relatively well in the early months of However, global trade could face its biggest shake-up in decades this year, driven by a number of factors that might come together in a powerful way. Major drivers include the follow-up to Brazil s weak-flesh investigation, including recent restrictions on EU trade; a pending ban on stunning in Saudi Arabia that could affect Brazil and the EU; the current NAFTA renegotiations, potentially impacting North American poultry trade; and Chinese investigations into poultry dumping by Brazil. All of these factors have the potential to shake up global trade streams and heavily affect prices later this year. Brazil will be the most affected country, as many of these factors will affect its trade position. Better local market conditions in Brazil cannot fully offset the potential negative impact of these trade disruptions. Countries like Ukraine, Russia, and Poland stand to gain if Brazil loses market share. Prices for globally traded poultry could be affected by these shake-up factors, with EU trade restrictions impacting breast-meat prices, the Saudi standard changing the whole-bird market, and the China/Brazil dispute and NAFTA renegotiations potentially impacting the dark-meat market. Global chicken monitor* Q Q12018f Whole chicken Avian influenza (AI) pressure is still significant, but the number of cases is lower than in the 2016/17 northern hemisphere winter season. China has shown the most remarkable recovery, with one of the most profitable winter seasons in years for the industry, thanks to AI vaccination. Regional industries are still performing well especially South Africa (despite the big listeria crisis) and Mexico, but also countries like Indonesia, India, and Japan. EU breast meat prices will rise due to Brazil restrictions. Russia and Thailand are suffering from oversupply after industry expansion Breast meat Leg quarters * Chicken price trend for cuts entering global trade Outlook for 2018: US: solid margins with balanced industry growth Acceptable margins, with strong leg and breast prices Production up 2.2% Rising US exports, especially in 2H EU: ongoing strong performance Balanced EU market after restrictive supply growth due to AI Brazil import restrictions will affect EU breast meat price levels Strong seasonal demand expected in Q2/Q3 Brazil: big challenges in global trade Exports down 8%, especially to key export markets Saudi Arabia and the EU Temporary restriction on leading poultry company from exports to the EU Saudi Arabia is implementing a ban on stunning China: strong market improvement Industry recovered after 2017 AI crisis, with lower supply and vaccination against the disease Stronger domestic broiler and DOC prices China returned as a net exporter in Q /12 RaboResearch Poultry Quarterly Q March 2018

2 Global outlook 2018 A big shake-up in global trade this year? Global poultry has been performing quite well over the past quarter, with reasonable price levels and margins (see Figure 1). However, market participants are focused on the potential for a big shake-up in global poultry trade in In the coming months, the global poultry market is set to go through turbulent times especially due to ongoing restrictions because of AI, the weak-flesh investigation in Brazil, and recent temporary restrictions on exports to the EU for one of Brazil s leading exporters. Other potential obstacles include the pending ban on stunning for exported products into Saudi Arabia, the antidumping investigation into Brazilian imports by Chinese authorities, and NAFTA renegotiations, which could potentially shake up North American poultry trade. Given these shake-up factors, Brazil s position in global trade is going to be challenged, as the country is the world s leading poultry exporter, with 35% market share. This could potentially impact global poultry trade, along with the local Brazilian market. In addition, the US s position could be challenged if NAFTA renegotiations lead to restrictions on US-Mexican poultry trade as Mexico is the largest export market for the US. In recent years, AI has been the major source of volatility within the poultry sector. Until mid-2016, Brazil was one of the only major countries free of AI and therefore able to capture market share from exporters who have been restricted by AI, especially the US (see Figure 2). This changed in 2017, when the US gradually came back as an exporter and Brazil was hit by the weak-flesh investigation, which hit importer confidence in Brazilian poultry and pushed authorities to increase scrutiny of the Brazilian industry. Major traders in Europe and the Middle East started substituting Brazilian poultry with supply from other sources, mainly from Eastern Europe. EU auditors claim to have found violations of EU import regulations, especially regarding salmonella, and this seems to be a major reason for restrictions on exports from some Brazilian poultry exporters. This is a major blow to the Brazilian industry, as it includes one of the key exporters and this will challenge its position in one of the main markets. It remains to be seen if other violations have been found and if more exporters will be restricted in exporting to the EU or if these restrictions will quickly be removed. Even more change is underway for the global poultry trade. Saudi Arabia and the United Arab Emirates (UAE) are currently implementing a stricter halal standard, which will ban the stunning of poultry. This will affect Brazil, which contributes 65% of all imports to this market. To a lesser extent, it will also affect the EU, Ukraine, and the US (exports to the UAE). As it now looks, all poultry produced in Brazil after 1 April 2018 cannot be stunned for exporting to Saudi Arabia or to the UAE (except Dubai). Similar decrees will be issued to other exporters in the coming months. Chinese authorities are also currently preparing to open an investigation into the dumping of Brazilian poultry in China, which, in response, will consider imposing import duties. Figure 1: Global broiler, beef, and pork prices vs. feed-cost monitor, Q Q4 2018f Figure 2: Rabobank global poultry-trade monitor, Q Q ,500 3,500 Index regional trade volumes (thousand tonnes) 1, ,800 2,100 1, global trade volumes (thousand tonnes) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2f - Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q Feed Poultry Pork Beef Source: Bloomberg, Food and Agriculture Organization of the United Nations, national statistics, Rabobank 2018 Global Brazil US EU Thailand China Source: Bloomberg, national statistics, Rabobank /12 RaboResearch Poultry Quarterly Q March 2018

3 NAFTA renegotiations are another potential disruptor this year especially for the US, which exports 3m tonnes of poultry each year. Mexico represents 20% of total US poultry exports, while Canada takes another 5%. Any changes to US poultry exports could affect the industry outlook and indirectly impact global market circumstances. If NAFTA negotiations result in trade restrictions on trade, the US will be challenged to find new markets globally, and this would likely result in falling dark-meat prices. Another challenge for global poultry is the listeria outbreak in South Africa the biggest case ever. Tragically, 180 people have died, and thousands have become ill from the bacteria. The origins of the disease are not yet clear. Some blame imported MDM products usually key ingredients in sausages, where the bacteria has been found but this has not yet been proven. This cause is still being investigated, and if it is indeed linked to imports, it could also shake up global poultry trade. Positive for global poultry so far in 2018 is the lower pressure from AI even though major markets like China, Japan, the EU, India, Russia, and the Middle East have seen outbreaks. So far, the number of outbreaks this year has been significantly lower. The implications are fewer disruptions in global poultry-meat trade, as well as to the trade of breeding stock in this northern hemisphere winter season, compared to 2016/17. All of these developments have the potential to shake up global trade. We have already seen global whole-chicken prices fall and although breast prices have remained firm, current EU-Brazil developments will likely affect breast-meat prices globally (see Table 2). The China/Brazil anti-dumping case and NAFTA renegotiations could also impact global dark-meat markets. Table 1: Global live-broiler and feed-ingredient monitor, Q Q4 2018f Change Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1f Q2f Q3f Q4f Q4-Q3 Q4-Q3 EU % +3% Live broilers Brazil USD/kg % -8% China % +17% Wheat (USD/bu) % +8% Grains & oilseeds Corn (USD/bu) % +4% Soymeal (USD/tonne) % +12% Source: Eurostat, Food and Agriculture Organization of the United Nations, national statistics, UBABEF, Rabobank 2018 Table 2: Global whole-chicken and chicken-cut markets (USD/100kg), Q Q Change Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q4-Q3 Q1-Q4 Whole chickens Brazil wholesale % -10% EU wholesale % +5% Breast meat EU import price Brazil EU import price Thailand % +8% % +13% US leg quarters, Leg quarters north-east % -2% Japan import price % -14% Feet China import price % +8% Processed chicken EU import price Brazil % +15% Source: Eurostat, Food and Agriculture Organization of the United Nations, national statistics, UBABEF, USDA 2018; Rabobank /12 RaboResearch Poultry Quarterly Q March 2018

4 It s clear that 2018 has the potential to become one of the most turbulent global trade years in decades. Some exporters might benefit, while eastern Europe and, to a lesser, extent Thailand and China are well-positioned. Ukraine, Russia, and Poland are reporting record-high export levels and are increasingly jumping into positions vacated by the traditional leaders. This is a process which will likely continue over the next year. Trade volatility, but solid local markets Global poultry markets will likely be affected by the shake-up factors later this year, which could impact all companies active in global trade. However, this only makes up a small part of the global poultry industry (global trade represents just 12% of total production). If we look to local industries, poultry s performance in most countries is still strong and is expected to remain relatively stable. One of the major worries aside from global trade volatility is the development of feed prices, which, in recent months, have gradually been rising in many markets due to drought in the southern hemisphere, especially in Latin America. In general, it is believed that most of the negative weather impact will be offset by high global stock levels, but any further worsening of the outlook could impact future feed prices. The US, the EU, Japan, India, and Indonesia are facing positive local market conditions and in all cases, local industries are expected to remain profitable in the next two quarters. The EU industry will benefit here from rising breast meat prices after the recent restriction exports from one of the leading poultry producers from Brazil. Prices in Saudi Arabia will rise sharply when the government indeed will apply the new halal standards for imported poultry. Saudi Arabia has a self-sufficiency rate of only 45 percent and there will be no alternative supplier who can replace the imported volume of Brazil and EU by meeting the new standards in the short term. Currently, the weakest performing industries are exporters Brazil and Thailand, as well as Russia. In all cases, this is related to oversupply. In Brazil, this is a result of the country s challenging position in global trade, while in the case of Thailand and Russia, it is related to overly-ambitious production expansion, which has caused oversupply in local markets. Both countries benefit from turbulence in global trade and are reporting rising exports but not sufficiently strong to offset weak local market conditions. Currently, the best-performing industries in the world in terms of profitability are South Africa and Mexico, who are both enjoying strong market conditions. South Africa has seen a massive 15% reduction in production in recent months, compared to the year before which leads to higher local prices. The March 2018 listeria scandal in sausages has not yet had a significant impact on the market, as it is not linked to local poultry production. The major market recovery in China is also important. The industry is seeing rising prices in the winter season, due to short supply. This is caused by recovering demand and especially, the significantly lower number of AI cases: a success of China s vaccination campaign against the H7N9 strain. 4/12 RaboResearch Poultry Quarterly Q March 2018

5 Dashboard Legend and units Production Exports Imports Price Feed price tonnes production weight kg kg = year-on-year change All prices in local currencies EU: ongoing strong performance Production broiler Export poultry Import poultry Whole frozen broiler price (EUR/kg) Feed price (EUR/kg) Ongoing growth Recovery Lower Brazil and Thailand Higher Increasing Dec: 1,050 YTD: 1,269 Q4: 445 YTD: 1,616 Q4: 70 YTD: 605 Feb: 1.83 YTD: 1.83 Feb: 0.33 YTD: % +2.7% +4.0% +2.9% -12.0% -11.9% +2.0% +1.1% -2.5% -2.3% Source: Eurostat, MEG 2018 US: solid margins with balanced industry growth Production broiler Export poultry Composite broiler price (USD/kg) Whole broiler price (USD/kg) Feed price (USD/kg) Growth to slow US exports recover On the upswing Ongoing strong Feed-cost relief to slow Q4: 3,750 YTD: 17,898 Q4: 886 YTD: 3,320 Feb: 1.78 YTD: 2.05 Feb: 1.88 YTD: 2.12 : 0.30 YTD: % +2.5% +18.9% +6.0% +4.3% +10.9% +19.0% +11.6% +4.5% +4.5% Source: USDA 2018 Brazil: big challenges in global trade Production broiler Export poultry Live broiler price (BRL/kg) Whole broiler price (BRL/kg) Feed price Dropping production Disappointing levels Lower costs Falling prices Higher prices Feb: 305 YTD: Feb: 305 YTD: Feb: 2.48 YTD: 2.49 Feb: 3.22 YTD: 3.33 Feb: 0.79 YTD: % -6.0% -8.0% -5.0% -6.0% -14.0% -12.0% +11.3% +4.6% Source: CECEX, MDIC /12 RaboResearch Poultry Quarterly Q March 2018

6 US Our outlook for 2018 growth in the US broiler industry of 2.2% remains intact as the industry continues to expand the breeding flock (+4%) to compensate for ongoing production issues, such as seven-year-low hatchability (see Figure 3). We remain confident in our outlook for modestly higher slaughter, with little to no growth in bird weights. Composite chicken prices remain ahead of year-ago levels, although the premium has narrowed in recent weeks. Strength in leg quarters YTD (+9% YOY) and steady boneless prices were offset by a sharp counterseasonal drop in wing prices (-13% YOY in February). Exports of US chicken through calendar year-end 2017 were up modestly (+2% YOY) due to a rebound in trade with Cuba, Taiwan, and Guatemala. Exports to traditional export markets Mexico and Angola have been pressured, as has trade with NAFTA partners Mexico and Canada (representing 25% of the total). NAFTA trade could be at risk, given ongoing negotiations, as importers have already been moving to alternative suppliers. Margins remain acceptable and modestly above breakeven as gradual increases in composite pricing have offset the increase in feed, labour, and freight. Volatile grain prices in recent weeks due to drought-related production issues in South America make profitability less predictable. However, given relatively large carryover stocks and prospects for a large US crop, we remain relatively optimistic with regard to the outlook for industry profitability in We expect higher labour and freight costs to remain challenging in the short run, but predict much of the increase can be recouped over time. Mexico Domestic prices continue to see an increase, with a strong start of the year, compared to 2017 (see Figure 4). On average, in the first three months of 2018, wholechicken prices rose from MXN 33.1/kg to MXN 36.7/kg, an increase of 10.8%. This has been attributed to religious holidays and a rise in feed costs. Trade uncertainty will continue to be a topic this year, as a final agreement on NAFTA has not yet been reached. In 2017, Mexico ended with lower imports from the US down 6.5%, compared to On the other hand, Brazil increased its volume of exports to Mexico and accounted for 11% of the country s total imports in In the first two months of 2018, Brazil has already added close to 12,000 tonnes, increasing its level of exports to Mexico by 38%, compared to uary and February Although the US continues to be the main source of imports, we expect Brazil to play a bigger role in Mexico s chicken imports, as NAFTA negotiations continue during Poultry production started the year strongly, with the first two months of the year seeing an increase of 3.2%, compared to So far, production has reached 521,000 tonnes, which is 16,000 tonnes more than last year. In March, there have been two cases of AI in the central Mexican states of Guanajuato and Querétaro. If these remain isolated cases, the overall impact on markets is expected to be limited. Consumption is expected to reach 4.2m tonnes this year. However, given the rapid expansion of the pork sector, along with the decreasing price gap between pork and poultry, competition between these two proteins will most likely intensify during the year. Figure 3: US hatchability, 2016-Feb 2018 Figure 4: Mexican chicken prices, 2017-Mar % 40 82% 81% 80% 79% 78% % Week 1 Week 4 Week 7 Week 10 Week 13 Week 16 Week 19 Week 22 Week 25 Week 28 Week 31 Week 34 Week 37 Week 40 Week 43 Week 46 Week 49 Week Feb Mar Apr May Jun Aug Sep Oct Nov Dec Five-year avg Source: USDA, Rabobank 2018 Source: GCMA, Rabobank /12 RaboResearch Poultry Quarterly Q March 2018

7 Brazil Brazilian poultry exports declined by almost 8% in the first two months of During this period, Saudi Arabia, the main destination, reduced its imports of Brazilian poultry by 12% in volume terms, while the EU (the fourth-largest destination) declined by 38%. At the same time, other buyers such as China, the UAE, South Africa, and Mexico increased their chicken imports from Brazil. Brazil s meat exports are facing some headwinds. Although Brazilian authorities have done their best to clarify that the continuing federal police investigation dubbed weak flesh is restricted to irregularities that occurred in the past and only affected a limited number of plants (with export licences already suspended) it is possible that overall exports could be negatively impacted. Meanwhile, some Brazilian chicken facilities have been audited by various importers. In the domestic market, given the improved economic outlook, Rabobank expects a more consistent recovery in consumption. However, export performance continues to be crucial for local prices. In February 2018, wholesale chicken prices were 14% below levels seen in February Meanwhile, on average, feed prices were 10% higher than in February 2017 particularly due to expectations of a lower corn supply this year. All in all, margins have been pressured during Q (see Figure 5). Moreover, given that stronger domestic consumption is likely, the Brazilian poultry industry is expected to deliver improved results. This will also depend on the performance of the still uncertain wintercorn crop and on how the current challenges in global trade develop for Brazil s exporters. EU The EU poultry industry is performing relatively well, although margins have been impacted by gradually rising feed prices (+3%) and seasonally weaker market demand in Q (prices -2%). A good market balance with ongoing supply-growth discipline, after the many AI outbreaks in the 2017 winter season, has been positive for the industry. Growth in traditional eastern European regions Poland (only +4%) and Hungary (-5%) has been slower than in previous years. So far (early March), there have been fewer AI outbreaks with only the Netherlands, Italy, and France reporting cases. The improved trade balance has also been positive, with exports continuing to rise for two quarters in a row, reaching the highest-ever quarterly export level of 450,000 tonnes. Total exports have reached 1.7m tonnes (+3%), with especially strong exports to Ukraine, Hong Kong, Vietnam and Africa. Total imports in 2017 dropped by 11%, to 805,000 tonnes, especially due to significantly lower Brazilian (-21%) and Thai imports (-9%). Ukraine increased exports by 65%, to 80,000 tonnes. The outlook for the industry remains positive and although feed prices might rise slightly, an expected seasonal rise in demand in Q2 and Q3, along with ongoing low(er) imports (especially from Brazil since the new restrictions) should offset the negative cost impact and will likely lead to higher breast meat prices This will offer the industry a solid base from which to remain profitable (see Figure 6). The determining factor will be whether EU supply growth is too optimistic. Ongoing investments in eastern Europe will challenge overall supply growth, as some new capacity enters the market in the coming quarters. AI is another factor to watch, even though current market impact is limited. Figure 5: Brazilian broiler and feed-price trend, Feb 2018 Figure 6: Broiler feed-price and margin trend in northwestern Europe, 2010-Feb indicative feed price, BRL/kg chicken wholesale price, BRL/kg Index, 2010 = Dec gross margin, EUR/kg Feed Poultry meat Gross margin Broiler index Feed index Source: SECEX, MDIC, Rabobank 2018 Source: Bloomberg, Rabobank /12 RaboResearch Poultry Quarterly Q March 2018

8 Russia The Russian poultry industry went through a challenging year in 2017, which has continued into Q The main reason is that the market has become saturated with supply, while new production capacity continues to come online, driven by massive investments in recent years. Production grew by 8% in 2017, to 4.8m tonnes, and early 2018 indicates similar or higher growth rates. The consequence has been falling retail prices for broilers (-9%) significantly more than pork (-2%), while beef prices have increased (+2%) (see Figure 7). Lower feed prices in Q1 2018, compared to Q (-12%) due to the good 2016/17 crop harvest in Russia have been helpful, but not enough to bring the industry back into profitability. Several companies have recently come into financial difficulties. However, the Russian industry has benefited from increasing exports: total exports reached 162,000 tonnes in 2017, 44% more than in The industry receives support from the Russian government, with new markets especially in Asia and the Middle East opening. The outlook for the Russian industry remains challenging, as no clear sign has been seen in the industry of a muchneeded slowdown in production growth for the coming quarters. Although the total grain harvest this year is still expected to be near historic highs, at 110m tonnes, it is likely to be lower than the 2017 (134m tonnes) and 2016 crop harvests (121m tonnes). This poses a certain costprice inflation concern for the coming months, in line with what we see in international grain markets. South Africa The South African industry has been performing well since Q2 2017, helped by a significant reduction in production (- 15% in Q4 and early Q1, compared to a year before), while imports have also dropped (-4% in 2017). This resulted in a bullish period for the industry, with broiler prices moving to 10% to 15% higher levels between 1H 2017 and Q1 2018, compared to the year before, while feed prices dropped significantly due to the much better crop year in 2017, compared to 2016 (see Figure 8). Production has been low in South Africa due to many AI outbreaks in June 2017, which led to a massive culling of broilers. Also, in the period before the AI crisis, significant production capacity was removed due to ongoing weak performance, with the industry restructuring. Imports were also slower in 2017, but have somewhat recovered in early Imports have been lower due to AI-related restrictions on EU supply EU poultry exports to South Africa dropped from 270,000 tonnes in 2016 to only 76,000 tonnes in EU exports have been partly taken over by Brazil and the US. The outlook for the industry has been reasonable, but at the same time, has been challenged by the recent listeria outbreak in sausages, with tragic consequences. 180 lives have been lost to listeria, while thousands have been affected. Although no source has been formally identified, imported MDM is currently being blamed. So far, broiler prices have remained relatively firm, but this could potentially impact the market if people move away from eating chicken. The other main concern is rising feed prices already occurring due to the drought in South Africa and set to flow through the chain in the coming month, pressuring margins. Figure 7: Russian retail frozen-broiler (LHS) and feed-price (RHS) trend, Figure 8: South African broiler and feed-price trend, Q Q1 2018f , whole chicken RUB/kg ,000 16,000 14,000 12,000 feed price RUB/tonne frozen chicken ZAR/kg feed-cost index Q = Apr Oct Apr Oct Apr Oct 10, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3e Q4f Poultry feed Retail price chicken Feed Frozen broiler Source: Rostat, Rabobank 2018 Source: SAPA, News24, Rabobank /12 RaboResearch Poultry Quarterly Q March 2018

9 India After a seasonal dip in November 2017, India s average broiler prices rebounded to INR 77.6/kg lwt in uary 2018, the highest level since June 2017, amid demand recovery. Having peaked at INR 4.9/piece in November 2017, we expect live-bird prices to remain relatively unchanged through Q (see Figure 9). Feed raw materials (soybeans and corn) showed a mixed performance. Soybean production is expected to drop 17% YOY in the current season. Prolonged dry conditions have reduced planted acreage, while below-average monsoons during last year s kharif planting cut yields. In uary 2018, average soybean prices had increased 18% YOY. Corn prices remained 20% lower, compared to year-ago levels, despite an anticipated 3% YOY decline in 2017/18 output. In Q4 2017, poultry integrators reported sequentially higher margins, in line with higher volumes and prices towards year-end. We expect feed raw-material cost pressures to build modestly, keeping commercial farm margins in check for the remainder of Q While there are concerns as to how imports of US chicken cuts could affect live-bird prices, we believe the impact should be limited. Potential imports should primarily affect demand from the food-processing and foodservice industries in our estimation, these represent less than a 2% share of total demand, which is dominated by the live-bird market. We expect 2018 Indian poultry consumption to expand 4.5% YOY, to 4.6m tonnes cwt translating to 3.5kg cwt per capita. China China s poultry-market performance has greatly improved in recent months. White-feathered broiler prices reached CNY 8/kg in uary. Although prices dropped to CNY 7.5/kg in February, they were still 40% higher than the same period last year. Day-old chick (DOC) prices increased to CNY 3/bird, a huge jump from the level of below CNY 1/bird seen in the same period last year. At the current price level, participants along the supply chain can make a reasonable profit. Improvements in the poultry market are mainly due to lower production after destocking in the past years, along with recovering market demand. Until now, there hasn t been a large AI outbreak in China this winter except for a few isolated cases, which are supposedly under control. Compulsory vaccination of H7N9 as of 2017 and the closure of live-bird markets for the sake of biosecurity are believed to have contributed to the drop in AI cases. Poultry imports in uary increased 5% YOY (see Figure 10). Brazil continues to dominate imports, with an 85% share. During the same period, China s poultry exports continued to grow, with frozen exports up 11% and cooked poultry exports up 17% YOY. This turned China into a net exporter in uary. China s Ministry of Commerce announced that the antidumping and anti-subsidy duties on US poultry imports were removed as of 27 February As China s ban on US poultry imports starting in early 2015 is still in place, the duty removal has no immediate impact on either side. Future impact depends as to when China will lift the ban. On 7 March, China approved seven Thai poultry facilities to export frozen poultry products to the country. A month earlier, China approved several South Korean poultry facilities to supply chilled poultry meat. Figure 9: Indian broiler, DOC, and feed-price index, Figure 10: Chinese imports of poultry in volume (tonnes) and prices (USD/tonne), Feb ,000 3, ,000 3, /12 Apr/12 /12 Oct/12 /13 Apr/13 /13 Oct/13 /14 Apr/14 /14 Oct/14 /15 Apr/15 /15 Oct/15 /16 Apr/16 /16 Oct/16 /17 Apr/17 /17 Oct/17 /18 INR/kg tonnes 50,000 40,000 30,000 20,000 2,500 2,000 1,500 1,000 USD/tonne 10, Feb-11 Juy-11 Dec-11 May-12 Oct-12 Mar-13 Aug June-14 Nov-14 Apr-15 Sep-15 Feb Dec-16 May-17 Oct-17 Broiler Soybean Maize Wings Feet Other Wing price Feet price Source: Bloomberg, Rabobank 2018 Source: China Customs, Rabobank /12 RaboResearch Poultry Quarterly Q March 2018

10 Japan The Japanese poultry industry s performance has remained relatively solid. Prices of breast meat and legs have reached peak levels during the Japanese winter, due to an especially strong (seasonal) demand. This has been a good achievement, as production in Q reached a record-high level of 422,000 tonnes (+3% compared to 2016), and Q is also expected to be 3% above Q As imports also remain high, Japanese industry stock levels are rising and once more reaching peak levels (see Figure 11). It looks like Japanese traders are set to benefit from turbulence in international poultry markets, with Brazil looking for new markets, the US and China returning to exports, and Thailand fighting to retain share in the market. Japanese traders have gradually increased import levels this year, to 45,000 tonnes monthly import levels for processed meat and 50,000 tonnes for raw meat. The industry has recently been challenged by a new outbreak of H5N6 AI at a farm in Kagawi. This is the first case since March If this remains an isolated case, its impact on the market should be limited. The outlook for the industry is a bit more challenging. The current high stock levels might affect domestic prices in Q2 and Q3, especially as seasonal demand is also usually lower. The ongoing competition between exporters might push traders to continue importing more chicken, especially as South Korea has now opened the door for exports of processed meat to Japan. This is not a very solid base for maintaining current margins, especially as feed prices tend to slightly increase in line with international trends. Thailand After significant expansion, the industry has been suffering from oversupply over the last couple of months, with 7% more production in Several key players have reported more challenging performance in their markets. The oversupply situation caused DOC prices to drop sharply (-27%), although they are still relatively high. Broiler prices dropped 12% in Q1 2018, compared to Q (see Figure 12). The poultry industry is also affected by an ongoing oversupply of pork in the Thai market, resulting in low pork prices (-20%). From a demand perspective, domestic demand remains weak and not sufficient to absorb the rising poultry supply. Positives are export volumes, which have kept growing this year (+8%), to 790,000 tonnes. Exports to Japan and South Korea have especially risen, but we witnessed a drop in exports to the EU, which substituted more production in eastern Europe for overseas imports. The outlook for the Thai industry remains challenging, and the industry will need to be very disciplined with its growth this year in order to be able to gradually recover an appropriate market balance. Figure 11: Japanese domestic supply, Q Q ,000 Figure 12: Thai broiler-to-feed price monitor, 2015-Oct 2017 (Index) , tonnes 300, , , Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 - MarMay Sep Nov MarMay Sep Nov MarMay Sep Production Imports Feed price index Broiler index Day-old chicks Source: ACLI, Rabobank 2018 Source: Bloomberg, Rabobank /12 RaboResearch Poultry Quarterly Q March 2018

11 Indonesia So far this year, implementation of AGP-free feed has not had a meaningful impact on broiler production volumes. There have been reports of lower finished weight from early harvesting in uary, due to higher mortality rates in open-house farms for various reasons. Broiler prices in the key market of West Java remained strong in uary 2018 (+20% YOY), averaging close to IDR 20,000/kg lwt however, they softened in February 2018, to IDR 18,123/kg lwt (see Figure 13). The price swing reflected demand seasonality and, in some cases, higher mortality rates. Day-oldchick (DOC) prices were comparatively more stable, averaging IDR 4,711/bird in February 2018 (+4% YOY), up from IDR 4,545/bird in uary 2018 owing to a better balance between supply and demand. The government had reportedly set a grandparent-stock (GPS) import quota of 636,000 for 2018, down slightly from 650,000 in The recent drop in broiler prices was accompanied by lower domestic corn prices, driven by the ongoing corn-harvesting season in South Sulawesi. In February, average corn prices had declined by 16% vs. December But within the same period, the landed cost of soybean meal increased 10%, amid a lower prospective Argentine soybean crop and the weaker rupiah. We expect integrators feed and commercial farm margins to improve slightly in Q2 2018, amid modestly lower feed costs and due to the peak-demand season. This year s peak season for commercial farm chickens is expected to last from mid-april through mid-may. Indonesia s per capita chicken consumption is expected to reach 12.7kg cwt this year, rising ±5% YOY, amid improvements in purchasing power. This would translate to total broiler consumption of 3.3m tonnes cwt, expanding from estimated 2017 volumes of 3.2m tonnes cwt. Figure 13: Indonesian broiler, DOC, and feed-ingredient prices, Q Q ,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5, Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct SBM (per kg) - RHS Corn (per kg) - RHS Broiler (per kg lwt) - LHS DOC (per bird) - LHS Source: Bloomberg, Rabobank /12 RaboResearch Poultry Quarterly Q March 2018

12 Imprint RaboResearch Food & Agribusiness far.rabobank.com RaboResearch Food & Agribusiness Animal Protein Global Sector Team Analysts Justin Sherrard Global Strategist Nan-Dirk Mulder Europe Matz Beuchel Europe Adolfo Fontes Brazil Christine McCracken US Chenjun Pan China Andrick Payen Mexico Ben Santoso South-East Asia Don Close US Peter van Ferneij Europe Angus Gidley-Baird Australia Blake Holgate New Zealand Beyhan de Jong Europe Gorjan Nikolik Europe 2018 All rights reserved This document has been prepared exclusively for your benefit and does not carry any right of publication or disclosure other than to Coöperatieve Rabobank U.A. ( Rabobank ), registered in Amsterdam. Neither this document nor any of its contents may be distributed, reproduced or used for any other purpose without the prior written consent of Rabobank. The information in this document reflects prevailing market conditions and our judgement as of this date, all of which may be subject to change. This document is based on public information. The information and opinions contained in this document have been compiled or derived from sources believed to be reliable, without independent verification. The information and opinions contained in this document are indicative and for discussion purposes only. No rights may be derived from any potential offers, transactions, commercial ideas et cetera contained in this document. This document does not constitute an offer or invitation. This document shall not form the basis of or cannot be relied upon in connection with any contract or commitment whatsoever. The information in this document is not intended and may not be understood as an advice (including without limitation an advice within the meaning of article 1:1 and article 4:23 of the Dutch Financial Supervision Act). This document is governed by Dutch law. The competent court in Amsterdam, The Netherlands has exclusive jurisdiction to settle any dispute which may arise out of or in connection with this document and/or any discussions or negotiations based on it. This report has been published in line with Rabobank s long-term commitment to international food and agribusiness. It is one of a series of publications undertaken by the global department of RaboResearch Food & Agribusiness. 12/12 RaboResearch Poultry Quarterly Q March 2018