The poultry sector and more specifically turkey production are areas where stakeholders have very little influence on input and output prices. They use pelleted feed, either purchased individually or as part of an integration. Products are also sold individually or as live animals within an integration.
Their weak bargaining position forces these sectors to be “price-takers” and this is why they are more exposed to market effects, with negative changes immediately affecting the profitability of their business. And vulnerability makes planning more difficult. Quantifying the impact of market processes on the sector is essential in order to achieve better adaptability, although this is not the only solution to improving the position of the sector.
My analysis is based on financial data obtained from single-phase turkey production (rearing and fattening, two batches per year) for the period between 2013 and the present year. For calculating the costs I used higher feed prices for better nutritional quality feed, day-old poult prices and in the case of heating, the price of piped gas. For purchase prices I used the price actually paid to the producer based on classification at the slaughterhouse and after various deductions instead of contractual prices. To illustrate the trends in profitability, Figure 1 shows the price actually paid alongside the unit cost (per kg sold), with feed, day-old poult, wages (with other costs related to personnel), energy, litter and other (veterinary) items as the main factors.
Figure 1. Source: own data
The data sets acquired with the above described method encompass the last 10 years and show three distinct phases in profitability.
In the first period (2013-2015) costs and the structure of costs, along with fairly stable purchase prices at slaughter allowed for profitable production. Feed costs accounted for 70% of the costs, which can be considered an average value, with energy costs accounting for 4–6%, depending on the season. With additional animal welfare subsidies this meant solid profitability for the players of the sector.
The second period (2016-2018) was characterised by a 4-5% decrease in purchase prices, while the structure and the amount of costs remained the same. This market situation led immediately to a decrease in income, which supports my previous statement that negative market effects will have immediate effects due to the characteristics of the sector (long production process), its weak bargaining position and low adaptability.
Of course, the narrowing of financial possibilities could have been counteracted by decreasing costs and increasing efficacy, but cost reduction was also limited on the procurement side due to the already mentioned weak bargaining position, caused – among others – by the separation of crop production from animal production during the past decades. Survival depended predominantly on animal welfare subsidies in this period. Another option would be to improve feed conversion rate, a measure of biological efficiency. Unfortunately this is also influenced by different factors (e.g. animal health status, seasonality/weather, technology) that the producer can not influence or only influence at a high cost (investment).
There was great anticipation of a rise in purchase prices starting in 2019, which could have provided a new basis for stable, profitable farming. But COVID changed everything in the spring of 2020 and in my opinion, this is where the third period starts (2020-2022). The initial shock caused a drop in demand, to which the slaughterhouses reacted by decreasing purchase prices. The prices of feed raw materials started sky-rocketing because of the market disruption caused by the pandemic (sudden disruption of supply chains) and the decrease in crop yields due to unfavourable weather conditions in many areas, to mention only a few reasons.
The reaction to this crisis from the turkey industry and many others was to either temporarily stop production or switch to a different animal species. Although this slow-down was followed by an increase in demand and a consequent increase in purchase prices, the extent and the rate of this increase was nowhere near the increase of feed costs. Since production could not be supported anymore on a market basis, governments tried to mitigate the problem with crisis management subsidies in order to avoid the drastic collapse of the sector. Unfortunately this was not enough and the number of turkey producers dropped significantly, leading to a decrease in output for the sector. This period also saw a significant reduction in the country’s turkey slaughtering capacity, which further reduced production potential.
The drastic increase in energy prices came as a shock for the industry in such a weakened position. Energy prices started increasing in 2022 and reached staggering rates in 2023, leaving the producers with basically no solution to this challenge. Previously feed costs accounted for 70% of production costs, which meant that feed conversion rate (FCR) was one of the best, and almost the only indicator of production efficiency and profitability. With low energy prices producers were not forced to optimize energy (mainly heating) costs neither from the perspective of feed efficiency or at least for energy efficiency.
Since the poultry sector has a high energy demand per unit, the drastic increase in energy prices led to a change in the cost structure of production. While previously energy costs accounted for 4–6% of production costs, this increased to 12% (Figure 2.).
Figure 2. Source: own data
There was almost no way to fund these costs, resulting in a complete loss of income-generating capacity (Figure 3.) in the sector.
Figure 3. Source: own data
High energy prices didn’t “hit” the industry all at once, since they appeared in the cost of production with a delay because of the long-term contracts.
As previously mentioned, producers have always had limited opportunities for adaptation. Unfortunately the rising cost of borrowing – money needed for investments to modernise technology and to increase energy efficiency – further narrowed their possibilities.
The above described trends are also visible in the ratio of purchase price and the feed cost per 1 kg live weight. It is clearly visible that this price ratio indicating the other costs of production has started to decrease in 2020 from the level of equilibrium prices the market had reached in the previous years. This constitutes a problem because the purchase price has to cover increasingly higher costs – above the feed costs (live animals, wages, energy, etc.) – due to the changes in the level and the structure of costs. (Figure 4).
Figure 4. Source: own data
In the long term, it is crucial to apply state-of-the-art technological solutions that increase efficiency (biological, technological and energy) in order to improve sustainability and competitiveness of production. Energy and feed raw material prices have decreased in the past weeks, giving a slight ray of hope that the industry will be able to implement these investments and restore its income generating capacity.
We all know that “it is difficult to predict, especially the future” and the same applies to the questions whether the industry will be able to return to the levels before the evaluated period, and when that will happen.
Péter Kovács
Agricultural economist
