INDUSTRY OUTLOOK: NEUTRAL
TRIS Rating holds a “neutral” view for the livestock industry in Thailand. Revenues of livestock producers are forecast to grow in the next few years as demand grows in the domestic market and export markets. Profits of livestock producers are expected to improve in 2019. The price of swine is expected to recover during this year but the price of broilers is expected to remain low. Livestock producers must contend with higher costs for feed, especially corn. The leverage level of livestock producers is forecast to remain high.
Poultry Industry in Thailand
Exports are rising
Exports of broiler meat are expected to increase in 2019 as demand remains strong in many key markets abroad. Thailand remains the fourth-largest exporter of broiler meat, trailing Brazil, the United States (US), and the European Union (EU).
Chicken meat exports grew by 10.7% to 839,428 tonnes in 2018 from 758,478 tonnes in 2017. The rise was mainly from an increase in the exports of uncooked chicken meat. Exports of uncooked chicken meat rose significantly to 278,986 tonnes, climbing by 23.6% compared with a year earlier. In addition, Thailand gained a competitive advantage over major exporting countries. For example, chicken meat from Brazil was banned by the EU in 2018 due to concerns over salmonella contamination.
Japan and the EU are Thailand’s two largest export markets for chicken meat. Japan accounted for 55% of exports (by value) in 2018, followed by the EU (27%). In 2018, exports to Japan and the EU continued to rise, climbing by 4.8% and 13.7%, respectively. Exports in 2019 are forecast to keep growing for two main reasons: strong demand and the high quality of chicken meat from Thailand.
Oversupply in domestic market
In Thailand, broiler prices in 2019 are forecast to remain low due to a supply surplus. Broiler producers have had to contend with declining prices for three consecutive years. The broiler prices dropped to an average value of Bt30.2 per kilogram (kg) in 2018, down from Bt35.1/kg in 2016.
Despite the low prices, poultry production in Thailand is forecast to increase. Production is expected to reach 2.4 million tonnes in 2019, from 2.3 million tonnes in 2018, as reported by the Office of Agriculture Economics (OAE).
Swine Industry in Thailand
Fattener prices rebounded
Fattener prices in 2019 are expected to improve as production and demand come closer to balancing. Fattener prices have increased steadily since April 2018, reversing a downtrend. From an average price of Bt40/kg in January 2018, fattener prices increased to Bt56.8/kg in April 2018, and peaked at Bt63.8/kg in November 2018. For the year, the average price was Bt55.3/kg, 4.9% lower than the average price in 2017.
Prices rebounded to an increase in exports of live swine to neighboring countries, especially Cambodia. Since demand is forecast to keep rising, pork production in 2019 is expected to increase slightly to 1.5 million tonnes, up by 0.5%.
Rising Feed Costs
Corn is a major feed ingredients in broiler and swine feed. Corn makes up around 60% of broiler feed and 20% of swine feed.
Corn prices spiked recently, squeezing the margins of livestock producers. Corn prices in Thailand jumped to an average of Bt9.85/kg in 2018, up by 19.4%. Prices are expected to increase in 2019 due to a production shortfall in Thailand and government intervention in the market. The supply shortage will continue through 2019. Domestic corn production is expected to rise, but only slightly. Production is forecast to reach 5.2 million tonnes in 2019, yet feed mills are expected to need around 8.4 million tonnes of corn to produce broiler and swine feed.
The Thai government imposed some measures to protect domestic corn growers. The government set a minimum price for locally-grown corn. Feed mills must pay growers Bt8/kg. The government imposed a second restriction on feed producers. Feed makers are permitted to substitute cheaper ingredients, such as imported wheat, instead of using corn purchased from domestic growers. However, the government limited wheat imports to no more than one-third of the amount of corn used to produce feed. This requirement will limit the ability of feed mills to use substitute cheaper ingredients.
FINANCIAL HIGHLIGHTS
Operating margin will gradually improve
An excess supply of livestock in Thailand hurts most livestock producers. The operating margin before depreciation and amortization of most livestock producers rated by TRIS Rating dropped in 2017 and in the first half of 2018 (H1/2018). For example, the operating profit margin of Betagro PLC (BTG) dropped to -4.5% in H1/2018 from 1.4% in 2017, and the operating profit margin of CPF (Thailand) PLC (CPFTH) plunged to -2.2% in H1/2018 from 4.1% in 2017. Similarly, the operating profit margin of Thaifoods Group PLC (TFG) slipped to 5.7% in H1/2018 from 10.2% in 2017. One exception was the operating profit margin of Chareon Pokphand Foods PLC (CPF). The margin of CPF rose slightly to 6.9% in H1/2018 from 6.2% in 2017. CPF’s operating profit margin was less affected by drops in livestock prices in Thailand because it is more diversified — geographically and by product type — than many of its competitors.
TRIS Rating believes that the profits of livestock producers will gradually improve in 2019. Swine prices have been rising since H2/2018. However, profits may stay in check as feed costs rise.
Leverage remains high
The levels of leverage at all the rated livestock producers rose significantly in H1/2018. The rises were due to drops in profits. For example, BTG’s debt to capitalization ratio weakened to 65.2% in H1/2018 from 55.4% in 2017. CPF’s debt to capitalization ratio rose to 59.3% in H1/2018 from 57.8% in 2017. The same ratio at CPFTH climbed to 65.7% in H1/2018 from 60.2% in 2017, while TFG’s leverage increased to 58% in H1/2018 from 52.3% in 2017.
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