EconSouth (First Quarter 2006)
Avian Flu Has Poultry Industry in a Flap
With both prices and exports declining in the wake of the recent outbreak of the avian flu, it seems everything but the sky is falling on the poultry industry, a major player in the Southeast’s agricultural sector. But despite the short-term threat posed by the deadly virus and the long-term threat of international competition, the industry keeps scratching along.
Television hostess Oprah Winfrey drew attention to the avian flu issue with a January 2006 telecast titled “Bird Flu: The Untold Story.” To help tell that story, Winfrey enlisted Dr. Michael Osterholm, director of the Center for Infectious Disease Research and Policy and associate director of the Department of Homeland Security’s National Center for Food Protection and Defense.
Initially, this episode focused on the lethal danger of H5N1, a strain of the avian (or bird) flu, and how the virus could evolve into a strain that could lead to the planet’s fourth pandemic in the last 100 years. Central to the discussion was how this deadly disease is transmitted through a variety of fowl, including wild ducks and domestic turkeys and chickens.
With nearly 10 million viewers watching, Winfrey asked the single question that is beginning to plague what has been a healthy and expanding industry, particularly in the Southeast: Should we not be eating chickens?
To the poultry industry’s chagrin, this question is being repeated around the globe. The World Health Organization’s (WHO) Web site asks “Is it safe to eat poultry and poultry products?” in a list of FAQs on the avian flu.
So far, the answers have been positive for poultry. Osterman said that chicken is “perfectly safe in this country.” The WHO says that even in areas experiencing avian flu outbreaks, poultry and poultry products can be safely consumed provided that all parts are fully cooked at 70°C (158°F) (no pink parts) and that eggs are properly cooked (no runny yolks).
Foreign markets losing appetites for chicken
Although welcome, these messages have done little to quell fears that have led to a drop in poultry consumption, particularly at the international level. This decline dimmed some of the luster off 2005, a year in which domestic consumption had been projected to jump to a record high, with the average American consuming 87.7 pounds of poultry. Although domestic consumption numbers from the U.S. Department of Agriculture (USDA) aren’t final for 2005, in December this projection was scaled back to 86.7 pounds per capita—half the increase that had been predicted over 2004’s 85.4 pounds.
Exports from the United States grew by 23 percent from 1.9 million in 2004 to 2.1 million metric tons in 2005, according to USDA statistics. But this growth could have been greater if not for the late-year downturn triggered by an outbreak of the avian flu in the Middle East and Eastern Europe. Turkey reported its first outbreak of H5N1 avian influenza in poultry in mid-October 2005. In the next three months, the Turkish Ministry of Health reported 21 cases of the virus, including four fatalities. Two additional cases were reported in Iraq in January 2006.
The region was particularly alarmed because the disease, which has a mortality rate of more than 50 percent, had previously been confined to Southeast Asia, where humans first contracted it in 1997. The avian flu, first discovered in the early 20th century, had been confined strictly to birds until that 1997 outbreak.
Overall, U.S. poultry exports fell 15 percent between October and November 2005, from 235,000 metric tons to 199,000. This drop occurred even though export levels increased to 14 of the United States’ 23 export destinations. Prominent among those nations with drops in U.S. imports were several of Turkey’s neighbors: the Republic of Georgia (a 41 percent drop), Romania (69 percent), and Russia (8 percent). The decline in Russia was especially distressing because it is the largest importer of U.S. poultry, receiving roughly 40 percent of U.S. poultry exports in 2005. Mexico, the second leading importer of U.S. poultry, imported only a quarter of Russia’s 2005 total.
Poultry consumption took its hardest hit in Turkey, which does not import U.S. poultry. Toby Moore, a spokesman for the USA Poultry and Egg Export Council (USAPEEC) in Stone Mountain, Ga., said Turkey’s poultry association reported a 95 percent drop in consumption. It’s too early to tell how consumption in Iraq will be affected; however, demand should remain relatively strong because of chicken shipped to feed U.S. servicemen, according to Moore.
Southeast feels sting of poultry downturn
Not surprisingly, what’s bad for poultry can’t be good for agriculture in the Southeast. According to the USDA’s 2005 numbers, poultry and associated products were the leading agricultural export from Alabama, totaling $228 million, almost half of the state’s $568 million agricultural total. In Georgia, poultry and associated products ranked second, behind cotton, among the state’s agricultural exports, totaling $274 million.
However, the region shared in the industry’s disappointing end to 2005. Atlanta-based Gold Kist Inc., which exports 8 percent of its poultry production, reported a $9 million drop in net income to $25 million between the last quarter of 2004 and the same quarter in 2005. The nation’s largest chicken, beef, and pork producer, Tyson Foods Inc. of Springdale, Ark., has been affected as well. Tyson, which has plants in Georgia and Alabama, blamed a 19 percent drop to date in its first quarter 2006 profits on weak chicken prices triggered by avian flu fears.
The freezer is getting full
The recent drop in exports and consumption has had the expected effect on inventory in cold storage and price, according to USDA reports. Overall, broiler products in cold storage at the end of November were estimated at 869 million pounds, an increase of 13.5 percent from 2004. Leading the way for this increase were higher stocks of legs (up 120 percent), leg quarters (up 39 percent), and wings (up 27 percent). These products provide the bulk of U.S. exports whereas the more expensive breast meat is typically sold domestically.
Richard Lobb, director of communications of the National Chicken Council in Washington, D.C., thinks the drop in exports will eventually be counterbalanced by increasing domestic consumption. “When exports go down, there is only a certain amount that you can keep in cold storage,” Lobb said. “After that, chicken will sell for whatever price it can fetch. If people see inexpensive leg quarters, they’re going to pick them up. If anything, this should increase consumption in the United States.”
Prices, meanwhile, dropped less than two cents from the same quarter in 2004. A composite price for 12 major urban markets nationwide for the fourth quarter of 2005 (66.7 cents per pound for whole broilers) reflected a five cent drop from the previous quarter. Other broiler products suffered price downturns as well. In the Northeast, the December price for boneless/skinless chicken breasts was $1.01 per pound, a drop of 21 percent from 2004. The USDA expects prices to remain depressed for the next year.
While consumers around the world are asking whether chicken is safe to eat, some industry observers have a different question: Will a drop in demand and price coupled with a rise in inventory lead to a reduction in production?
To date, that hasn’t happened. Despite the weakness in demand and high stock levels, production of broiler meat remained high in 2005, up to 32.4 billion pounds, an increase of 3.8 percent over 2004.
David Harvey, a researcher for the USDA, foresees a change in production but not a reduction. “I think we’ll still see production grow,” Harvey said. “It will just be at a slower rate.”
Not all flocks birds of a feather
What has the poultry industry all aflutter is that this slowdown appears to be guilt by association rather than by commission. The outbreak of avian flu in Turkey was attributed to contact between domestic poultry and migratory waterfowl. Moore explains the distinction about the infected birds.
“There is a lot of poultry production in some of these countries that is not commercial, which means backyard, subsistence-type flocks,” Moore said. “They’ve got a few chickens or ducks for meat or eggs. . . . Almost without exception . . . the outbreaks that have occurred in Southeast Asia and Turkey have been in these backyard flocks. . . . All the people who have been infected with the virus have been in contact with infected poultry, working with the birds in a small farm-type setting.”
As Osterholm has pointed out, “Around the world, where these chickens are kept out in the open, where they’re not protected by secure barns, each one of those [chickens] is, in a sense, a virus test tube.”
This assessment is backed up by Christine Pearson, a public affairs specialist for the Centers for Disease Control and Prevention in Atlanta, who said information gathered by her agency appears to support that view.
“Commercial poultry has been largely unaffected by the virus,” Moore added, “but it’s been affected by the hysteria that has followed these outbreaks. The media have not necessarily made the distinction very clearly.”
USAPEEC President James Sumner, who is also president of the recently formed International Poultry Council (IPC), had stronger words for the media in a statement released at the 58th annual International Poultry Expo in Atlanta in January. “In most cases, consumers are being blanketed with news and information about highly pathogenic avian influenza, or bird flu,” Sumner said. “And much of the information consumers see, hear, or read is incomplete at best and inaccurate at worst.”
Rather than suffer this misidentification in silence, the industry is fighting back in multiple ways. USAPEEC announced a $1 million education campaign in January that focuses on how safe poultry is if properly cooked. The images and graphics designed for this campaign are being made available at no charge to poultry associations worldwide. Despite being funded by a U.S. poultry association, the materials do not promote U.S. poultry products because some nations have resistance to imported products, Moore said.
Another way poultry producers are fighting back is with testing. “[The avian flu] is not here and we don’t think that it will get here,” said Tom Hensley, executive vice president for Fieldale Farms in Baldwin, Ga. “But we’re testing every flock before slaughtering even though you can’t catch the avian flu by eating cooked chicken. We’re not taking any chances. It costs a little old chicken company in Baldwin, Ga., a couple of hundred thousand . . . but it’s worth every cent.”
Additionally, the industry took the step of forming the IPC in October 2005. This group, composed of poultry associations in all the major poultry-producing countries of the world, is intended to facilitate a global effort to address poultry issues, of which the avian flu is currently front and center.
Not all the news is bad
Despite the hit caused by the avian flu, the poultry industry can take a small measure of solace in a couple of developments. One is that the popularity of turkey meat is increasing. Turkey exports and prices are higher, and stocks are down from a year ago. Unfortunately for the poultry industry, turkey meat makes up only a relatively small part of the market (35.3 billion pounds of chicken to 5 billion pounds of turkey through the first 11 months of 2005).
The second development is that chickens are getting larger. The average broiler liveweight of chickens at slaughter was 5.49 pounds at the end of 2005, up 3.2 percent from 2004. This weight increase continued a long-standing trend. Starting at the end of 1998, the average broiler’s liveweight at slaughter climbed each year, starting at 4.96 and climbing an average of 0.07 pounds per year. The trend toward larger birds suggests the poultry industry will be ready to meet the demand when consumers return.
|Photo courtesy of Gold Kist Inc.|
A Flock of International Legislative Issues
Consumer reaction to the avian flu is getting most of the headlines, but lawmakers may have a bigger hand in shaping the poultry industry’s future by reducing trade barriers.
The Uruguay Round agreement in 1997 eliminated Korea’s import quotas on frozen chickens and reduced its tariffs to between 18 and 20 percent by 2004. According to USDA statistics, these steps supported a rise in imports of U.S. poultry from 13.2 million pounds in 1997 to 249.3 million pounds by 2002. Elsewhere, the Philippines opened a tariff-rate quota for poultry meat in 1998, resulting in a jump from 16,000 tons to 23,000 tons by 2004.
Other legislation affecting the poultry industry is in the works. From 2001 through 2003, U.S. poultry meat suppliers annually shipped an average of 65,000 metric tons valued at $61 million to the six countries combined that are part of the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR). If Congress ratifies CAFTA-DR in its current form, all import tariffs on U.S. poultry meats imposed by the six member countries will be eliminated over 10 to 18 years, depending on the product and country. Those tariffs currently range between 30 and 164 percent.
Part of this legislation would address how inspections can meet U.S. standards. Two key components of inspections in the United States are both performed by groups within the U.S. Department of Agriculture (USDA). The Food Safety and Inspection Service is a public health agency responsible for ensuring that the nation’s commercial supply of meat, poultry, and egg products is safe and correctly labeled and packaged. The Animal and Egg Production Food Safety Staff identifies food safety concerns associated with egg production and with production, transportation, marketing, and preslaughter preparation of livestock and poultry.
But the removal of trade barriers is a two-way street. Toby Moore, a spokesman for the USA Poultry and Egg Export Council, can foresee a day when other countries will not only compete with the United States for international business but also in the domestic marketplace. He sees Brazil as a specific competitor and noted that U.S. poultry producers would be hard pressed to match Brazil’s low production costs, driven by inexpensive labor and feed.
“Their industry is expanding at a tremendous rate, a lot more so than ours,” said Moore. “Their production is still below that of the United States, but Brazil’s poultry industry is export-oriented. They export about half or more of their production. We export about 15 percent of our production.”
David Harvey of the USDA doesn’t see strong international competition being as imminent as Moore believes. Harvey said that foreign producers, such as China, Mexico, and Brazil, may be daunted not only by several bureaucratic hoops but also by the falling price of breast meat. In 2004, the price of boneless, skinless breast meat averaged $1.77 per pound in the Southeast, with a peak price of $2.51 per pound. In 2005, the average price dropped to $1.28 with a peak of $1.48. In addition, Harvey noted that the declining price for broilers, when added to shipping costs, could affect how profitable exporting to the United States would be.
This article was written by Ed English, a staff writer for EconSouth, with assistance from Gustavo Uceda, an analyst in the regional section of the Atlanta Fed’s research department.