Structure and dynamics of australia's commercial poultry and ratite industries

1.4 Levels of Integration and Live Sales

In 2005, the degree of vertical integration between the various chicken meat companies varied considerably and the majority of meat chickens (70%) were produced by three main integrators. In 2009, however, there were only two large vertically integrated companies producing around 70% of meat chickens. The remaining 30% of meat chickens are produced by smaller vertically integrated companies and small processors. Growers contracted to processing companies produce the majority of meat chickens. Since 2005 there has been an increase in the proportion of birds grown and processed by independent companies. This has occurred through both acquisition of some market share from the main integrators and also an increased proportion of market growth.

There has been constant activity by smaller processors and grow-outs looking for more independence in the supply of livestock, in particular, live birds and DOCs. This has been driven by the tighter margins at all level of the industry. Such activity may involve small independent poultry processors, grower groups or non-aligned individual chicken meat growers who have moved out of a contracted relationship with a major company. The limited ability to get a reliable independent source of DOCs, the absence of available excess breeder facilities and hatchery space, limited availability of quality grow out shedding, and the high capital entry cost, has meant that none of these interests have progressed.

Completely integrated companies have their own genetic breeding stock, parent breeders, hatcheries, broiler grow out, processing plants, rendering facilities and feed mills.

The next level of integration is seen with companies who purchase parent breeders but other than that are vertically integrated. Feed supply may come from an independent commercial supplier. Some companies also purchase fertile hatching eggs and/or DOC’s.

In contrast, live sales customers purchase live grown broilers for processing in their own plants and distribution to customers. This is not a small sector of the market, being in some states responsible for over 10% of all processed broilers. While paying a premium price for the live bird these small processor are generally able to buy specific weight birds and in a weight profile that suits their particular market type. This enables a greater utilisation of all birds for the fresh market, reduces the requirement to sell excess stock or portions at reduced prices and, most importantly, the need to freeze birds or portions. The freezing of processed chicken meat in Australia dramatically reduces the commercial value of this stock and its profitability.

The nature of the Australian chicken meat industry, where two companies can be both customers of each other and at the same time competitors, can sometimes create strained trading relationships. It is in part for this reason that there has been a trend for the smaller producers to try and obtain independence via a greater level of vertical integration. Outcomes here have been varied with some companies growing substantially to become major industry players while others ceased operation as a consequence of unsustainable economics.

Where the economic margin on parent breeders, fertile eggs and DOCs is always profitable, the wholesale price of processed chicken meat can vary dramatically (by in excess of 50%). Profitability over the last decade, consequentially, has been unreliable and this in part has resulted in the consolidation of the number of industry players. Between 1990-95, six or more small to medium sized integrators have exited the chicken meat industry. While some have had financial difficulties an equal number have evaluated the long term economics of the poultry industry from an investment risk aspect and have decided to exit the industry to seek higher and more reliable returns.

Since 2005, profitability in the chicken meat industry continues to be unreliable and this has further been pressured by the high prices of feed and fuel over the last few years. Compliance costs including those for food safety, occupational health and safety and human resources have also increased directly and indirectly through the employment of more staff dedicated to these areas. The ability to pass these costs on to the retailer or consumer has been limited. Where it has been passed on to the live sale customers this has placed profit margin pressures on the viability of their businesses.

In 2009, one large international breeder of poultry (including broilers, layers and turkeys) formed a company to oversee the PAQ and breeding facilities for a broiler breeder in Australia and New Zealand (NZ).

1.5 Chicken Meat Markets and Product Movements

The level of live poultry or poultry product movements within national companies between states, between different companies or between processing plants is quite extensive in the Australian market. This is in general driven by supply and demand imbalances within individual companies created by livestock performance variations or market fluctuations.

Since 2005, there has been a greater expansion of chicken meat production in South Australia in part associated with some local government support and also a more expedited planning approval process.

The most difficult task of any company is planning for future chicken meat sales. As lead times are extremely long, increasing projected sale volumes requires capital investment and significant outgoing cash flow before any returns are realised. As an example, if a company decides that they wish to increase their sales volume long term by 10% (normal annual industry growth is around 2 to 5%) based on predicted increased sales and new market growth there is a need to increase breeding stock numbers and acquire all the necessary infrastructure for handling these increased numbers.

There will be a requirement for new rearing and breeding facilities, transport upgrades, hatchery upgrades, increased broiler grow out and processing capability expansion. The capital required for this is substantial and this is added to by cash costs which include livestock, labour, disposables, feed and services. The final processed product will then be invariably sold on 30 day terms. The time between capital expenditure on expanding the rearer breeder facility until the first increased sales can be 11 to 12 months. The failure at the end of this period to realise sales expectations can (and does) cause serious financial pressure on chicken meat companies. Oversupply in the market has serious negative consequences for the entire industry because processed chicken meat has a short shelf life and has to be sold quickly. There is also the need to meet the cash costs associated with items like feed, grower fees, labour costs etc. thus necessitating low price selling in an over supplied market.

For the reasons above, a five year strategic plan is difficult to develop in the poultry industry. This produces what is now seen as the cyclic to variable patterns of growth in the industry ranging from limited maintenance and capital expenditure to aggressive growth and acquisition.

The finished product profile is continually changing in the Australian market. Demand was initially for whole frozen chickens, then fresh whole chickens and then increasingly for takeaway, portions and ready to cook products. As a consequence of this, economics have demanded the growing of larger live birds in the field. This pressure on grow-out densities resulted in companies lowering placement densities, typically by around two birds per square meter. Contracted growers then increased their fees to offset the resulting productivity loss. Larger killing weights also necessitated processing line upgrades and greater processing plant productivity.

Further processed cooked product, while requiring substantial capital to set up, does allow the use of excess portions during fluctuations of fresh product demand. It can also allow the use of recovered meat products and improve returns.

Typically most processing plants do their first live bird catching and transport (pick-up) at around 1.60 to 1.70 kilograms live weight and these birds process out at around a 70% yield to produce a size 11 to 12 bird. These birds are typically used for the take away market.

Next pick-up is around 2.2 kilograms and these bird can be sold as bagged whole birds or tray packed. Finally, the last pick-up is for birds around 2.9 to 3.4 kilograms and these birds are used primarily for de-boned products such as breast and thigh fillets. These larger processed birds are often on sold to what are commonly known as de-boners who specialise in preparing not only the fresh portions but also further processed products such as Chicken Kievs. These products not only get distributed to consumers through such groups as specialist chicken retailers but also supply the restaurant and catering trade.

The supermarkets are a major purchaser of chicken products in Australia. However, company branding of chicken is still limited for those trading through the supermarkets and producers wishing to market products with specific branding claims generally need to expand their market outside the supermarket chains.

The next prominent area of sales is butchers, who often do their own de-boning.

Meat recovered from de-boned carcasses is used for products such as sausages, chicken loaf and chicken nuggets. Skin is also a valuable recovered product that is used primarily to enhance the taste of some products. Hard offal, which includes de-boned carcasses and necks, is sold in limited quantities to the direct retail market but is more commonly used in the manufacture of pet food. Some companies have their own pet food plants and these can contribute significantly to the profitability of a company. Soft offal and chicken heads can be used for pet food but are more often rendered into poultry offal meal by company-owned or outside rendering plants. Feathers are rendered into feather meal by a process which includes enzyme digestion.

Poultry offal has a high protein and moderately high fat content making it highly sought after by the international markets, particularly Asia, for livestock feed. This demand currently exceeds supply. Poultry offal is less often used in Australian poultry rations and feather meal, while a good source of sulphur containing amino acids, is now also not commonly used. Both products trade on the commodity market as a premium alternative to normal ruminant meat meal.

The reader is referred to a book titled “The Changing Chicken” by Jane Dixon, UNSW Press in order to obtain an overview of change in the chicken meat industry in Australia since World War Two.

Export of chicken meat is not significant. The expected increase of export sales as a consequence of concerns about AI in Asia did not materialise. However, the export of genetic stock from Australia to Asia is seen as a potential expanding market. There are limited exports into the Oceania, SE Asia and South Africa.