Poultry sector: Bottoming out

The Indonesian Breeder Association (GPPU) estimates a final total stock of 3.3bn day-old chick (DOC) broilers this year, while the domestic demand is only 2.44bn, or equal to an oversupply of 35%. At this stage, the listed poultry players are cutting DOC production (through early retirement of Parent Stock or DOC culling) by 15-20%. Current difficult operating condition has resulted in many small breeders going out of business. Hence, we believe the government may intervene to help small breeders and broiler farmers.

To stabilize the poultry market, the management of a leading poultry company we contacted indicated the possibility of the government in creating floor and ceiling prices or DOC production limitation through further Grand Parent Stock (GPS) import quotas, which were cut by 8% y-y earlier this year.

At this stage, the government has appointed an independent consultant to publish an audited report on the current condition of the poultry industry and possible solutions to improve its condition. We note that industry players expect GPS imports this year to be well below the import quota due to the bird flu epidemic in the US. This could help to improve local poultry market condition, in our view.

In India, broiler prices soared to a record high after El Nino killed more than 17mn birds in May-June 2015. A similar trend is occurring in Indonesia with average broiler price in July-August 2015 at around IDR19,500/kg, up nearly 10% compared to 1H15 average, and we expect further hike to allow for 3Q15 broiler ASP of around IDR20,250/kg. According to our industry source, the broiler mortality rate at the farmers’ level has risen due to draught and heat waves. Although we believe that the El Nino effect in Indonesia is not as severe as India’s, the higher chicken mortality rate has supported broiler prices post Lebaran and is likely to have improved the advanced commercial farm businesses on the ground.  

Generally, the dry season should benefit the large players due to their climate-controlled farmhouses with good water supplies.  On a more negative note, the El Nino is likely to result in a slight short-term slowdown in the growth of feed and DOC volume sales in 3Q15. This is likely to reverse in 4Q15, when higher broiler prices should incentivize broiler farmers to purchase DOCs and feeds, coinciding with the end of dry season.

We are looking at a 15-20% DOC production cut this year, resulting in 15-20% higher DOC production costs. We expect the new EBIT breakeven level for the poultry players to be around IDR4,800-IDR5,200/DOC. With the August 2015 average DOC price of IDR4,700/DOC, we expect breeders to be almost at the EBIT breakeven level for 3Q15. With higher DOC production costs and a slight increase in feed ASP, we expect broiler production costs should also rise. We expect the new EBIT breakeven price for broilers to be IDR17,500-19,000/kg. Thus, we should see some broiler EBIT profit for 3Q15.

3Q15 feed margins are likely to be supported by lower soybean meal (SBM) prices (in IDR terms). Additionally, the poultry-feed association and the government are still in discussions about the mechanism of the State Logistics Agency (Bulog), which will control the nation’s corn supplies. According to Bulog, the overall corn price (post this new mechanism being in place) will be cheaper, as the government will eliminate 1-2 distribution levels. Furthermore, the association is planning to revise up feed prices soon by around IDR100/kg soon.

In conclusion, upside risks for the poultry sector would be a successful government intervention to reduce DOC oversupply conditions and faster than expected improvement in GDP growth outlook to bolster domestic demand.