The poultry industry typically faces a market characterized by high volatility both in raw materials, such as grains and oilseed meals, as well as in final product prices. This volatility has been attributed to several factors, including among others the increasing demand for meat in Asian countries, weather-related issues, low stocks, diversion of grains and oilseeds for biofuel production, and a weak U.S. dollar.
Among all of these factors, dollar weakness is the least discussed, and least understood, and the factor which could have a high impact in determining the competitive position of producing countries and on operating margins of poultry producers.
Universal currency weakness
Typically, when analyzing markets and forecasting prices, poultry producers have focused on the basics of supply of raw materials and competitors' production, and on consumer demand. If necessary, adjustments are made for changes in economic conditions.
For decades, the U.S. dollar has been the strong currency, functioning as a universal currency. It was always the benchmark, mainly due to its stability. When Latin American poultry producers thought about exchange rate movements, they were in reference to the position of their own currency against the U.S. dollar and rarely on the relationship of their currency against that of other countries, and never of the U.S. dollar against other currencies.
Until 2002, the U.S. dollar basically had shown a steady strengthening (Figure 1), an element that granted certainty to the market. Viewed from the standpoint of the Latin American poultry producers, their currencies weakened against the U.S. dollar, although this made imports of grains and oilseeds more expensive in local currencies. On the other hand, weakness of their currencies operated as an additional element to improve their competitive position against U.S. products for exporting countries, or as a tariff on chicken and eggs for countries importing poultry products.
The dollar's weakness started in 2002, which was at first gradual. Because it was gradual, and at times unnoticed, dollar weakness had little impact on markets, and did not cause substantial changes in the relative positions of competitiveness either. The loss of the dollar value that accelerated as of 2007 reflected the worsening of the economic situation in the United States. By the end of 2008, faced with the fear that the economic crisis would deepened globally, the dollar temporarily recovered and then weakened again.
Impact on the poultry industry
There are several factors, as noted above, which impact prices of grains and oilseeds in the international market. However, as these grains and oilseeds are quoted in U.S. dollars, their relative price falls against dollar weakness, resulting in increased demand for these products, which in turn leads to an increase in price. Conversely, when the dollar strengthens, grains and oilseeds turn to be more expensive, relatively speaking, which shrinks demand and pushes prices downward. A more pronounced relationship is then developed between the movements of the U.S. dollar value and prices of these commodities.
This relationship is clear in Figure 2, in which the exchange rate of the U.S. dollar against the Euro was used as an example. Given the relationship between the U.S. dollar and these raw materials, which can amount to more than 60 percent of the total poultry production cost, the market will continue to be subject, in addition to other factors, to the uncertainty of the global economic situation, expressed in movements of the U.S. dollar exchange rate.
The case of Brazil's competitiveness
While the U.S. dollar weakness is a contributing factor to the volatility of raw material markets, it has also been used to adjust competitive relations in poultry markets. This can be seen when closely analyzing the case of Brazil against the U.S. poultry industry.
In the last quarter of 2002, when the U.S. dollar begins to weaken, the average exchange rate of the real - the Brazilian currency - was 3.67 per dollar. By November 2010, this ratio fell to 1.68 reals per dollar. In other words, if a kilo of chicken was sold in two reals at the end of 2002, the dollar equivalent was 54 cents. However, if a kilo of chicken was sold in the same two reals in November 2010, the equivalent was $1.18 dollars. In this way, it is clearly seen how the loss of the dollar value reduces competitiveness of the poultry industry in this South American country.
In the case of frozen chicken from Brazil (Figure 3), one can sense how the U.S. dollar weakness not only contributed to a loss of relative competitiveness compared to the American counterpart, but has also resulted in greater volatility of the Brazilian product. The graph shows the price of frozen chicken in Santa Catarina published by the Centro de Socioeconomia e Planejamento Agrícola (Socioeconomics and Agricultural Planning Center) expressed in reals and U.S. dollars at the exchange rate in force in each month during the period in question.
The first observation that sticks out is that the price expressed in U.S. dollars shows greater volatility than the same price in reals. This same volatility, a result of exchange rate movements, entails that as of May 2009 when the real began to recover, the chicken price in U.S. dollars grew faster than the same price in reals, which resulted in a relative loss of competitiveness of Brazilian chicken in front of its American rival.
Competitiveness effects and industry consolidation
The value of the U.S. dollar has two main effects for the industry: firstly, it determines the competitiveness of it against that of other countries, and on the other hand, increases the volatility of raw material prices, as these are priced in dollars. Faced with this situation, poultry producers will have to expand the number of variables analyzed, including the macroeconomic performance of not only their own country but of the global situation.
Fortunately, there are instruments to manage currency exchange risks, some of which poultry producers are already using. What they should do is to envisage the possibility of using them more intensively, in conjunction with other instruments such as options, to cushion volatility in margins of operations coming from movements of the U.S. dollar value in the global context.
Analysts do not expect a future strengthening of the U.S. currency, so producers will be forced to search for greater productivity. Conversely, the less efficient and productive companies can be weakened to make room for consolidation.
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