President, National Chicken Council (USA)
World Poultry Conference 2005
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Good morning. I am delighted to be here today to talk about the United States broiler chicken industry and its role in the American diet and in the world poultry economy.
When I started at the National Chicken Council, which was then called the National Broiler Council, no one knew for sure what direction the industry would take. Growth was sluggish and people were already suggesting that “chicken fatigue” had set in. After all, consumption had already hit the amazing level of seventeen kilograms per person per year. How much more could people eat?
Well, that was in 1972. I am still at the National Chicken Council. Consumption has grown to 39 kilograms per person per year. And people are still talking about chicken fatigue. Some things never change.
Our industry has done a remarkable job of responding to demand in the United States and building that demand through smart marketing and product development. The industry has also developed customers in markets around the world, and in recent years that part of the business has increased tremendously. I would like to discuss with you today how these factors fit together and where I see the industry going from here.
Let me begin with some of the basic facts of our industry and its growth over the years. We have about forty companies in the vertically integrated industry, a number that has declined over the years as the industry has consolidated.
Underpinning the growth of our industry in the United States has been tremendous growth in domestic demand. Chicken has always been popular of course, but when I was a boy, chicken was definitely second fiddle to beef and pork. In 1960, per capita consumption of broilers in the United States was only 11 kilograms per person. During the 1960s, however, people began to be more concerned about fat in their diets, and they saw chicken as a low-fat alternative to beef and pork. As a result, consumption of broilers grew to 17 kilograms per person by 1970.
Consumption has continued to increase at a pretty steady pace since then, averaging about 27 percent growth in each decade of the Nineteen Seventies, Eighties, and Nineties. We estimate consumption this year will reach about 39 kilograms per person per year.
In 1960, production of ready to cook broiler meat in the United States was about two million metric tons. By 1970, it had increased 75 percent to 3.5 million metric tons, and has continued to steadily increase since then. We estimate that production of ready to cook product will reach nearly 16 million metric tons this year.
In an effort to get the best return on investment in facilities, the industry has slowly but steadily increased the size of its most basic unit — the bird itself. Back in 1960, the average broiler weighed less than 1.6 kilos when fully grown. It got to 1.8 kilos by 1982 and 2.3 by 1999. Average live weight currently stands at nearly 2.5 kilos.
The value of production has also gone up from $10 billion to $20 billion in the last ten years.
Unfortunately, increased value of production does not always mean increased profitability. In the past fifteen years, the industry has had five years in which it was at or below the break-even point. A notable exception was 2004, when diets rich in protein and low in carbohydrates were all the rage. Demand for poultry, as well as red meat, was at unprecedented levels. However, the low-carb trend ran its course. Prices returned to more normal levels in the middle of the year. Nevertheless, 2004 was a very good year for our industry, and all indications are that 2005 will be a good year, as well.
In the year 2005, we expect to see production of nearly 16 million metric tons and domestic consumption of thirteen and a half million metric tons. Exports are projected to be about 2.3 million metric tons. These numbers do not add up precisely because consumption is measured on a retail weight basis whereas production is measured on a ready to cook weight basis.
Retail grocery continues to be our biggest outlet, accounting for 58 percent of the product sold in the domestic market. Foodservice of all kinds accounts for the other 42 percent. Fast-food outlets, such as KFC, McDonald’s, and a host of others, account for sixty percent of the product sold in the foodservice channel and twenty-five percent of product overall.
Let’s take a closer look at the foodservice market. Here is a list of the top twenty restaurant chains in the United States, ranked according to their sales in 2003, the latest data publicly available. The list also shows the rankings from 1999 to give you some idea of the changes in this sector.
McDonald’s is by far the largest foodservice vendor in the United States and has been for many years. It is also the second largest seller of chicken products, and in many locations, chicken actually outsells the hamburgers on which the chain was built. McDonald’s sells chicken strips and several different types of sandwiches as well as its famous McNuggets. Following McDonalds’s are Burger King and Wendy’s, which also offer several different types of chicken. Coming up fast on the list is Subway sandwich shops. Our friends at KFC come in at number 7 in total sales, although we believe they are the largest seller of chicken in the United States.
Over the years, the menus at chain restaurants have changed and diversified in ways that have greatly benefited the chicken industry. McDonald’s, Burger King and Wendy’s were all originally famous for hamburgers. Now they all sell very large amounts of chicken. Even concepts that are oriented to other food groups sell lots of chicken. Red Lobster is a seafood restaurant, but it sells chicken. Dairy Queen is famous for milk shakes, but it also sells chicken. In fact, of the twenty restaurants on this list, only two do not sell large amounts of chicken.
SURVEY OF MENU ITEMS
To take a closer look at what’s really being sold at restaurants in the United States, we obtained data from Restaurants and Institutions magazine, which conducts a restaurant menu survey every two years. The 2003survey, the most recent available, contacted 1,443 restaurant operators in all major segments of the industry.
The survey seeks to uncover the number of outlets that have certain items on their menus and tries to determine the “sales strength” of those items. The survey covers a wide range of chicken products.
Most Prevalent Items
According to the survey, the single most prevalent chicken item on the menus of restaurants in the USA is Caesar salad with chicken, sold at 66 percent of the operations in the survey. The prominence of this item no doubt stems from the fact that it is popular across the board and is sold at quick service outlets, in casual dining restaurants, and fine dining establishments alike.
The second most prevalent item is chicken strips or tenders — basically breaded pieces of white meat, menued at 50 percent of restaurants. Rounding out the top five are grilled chicken breast, grilled chicken breast sandwich, and that great American favorite, chicken noodle soup.
The survey also asked operators for their opinion of the “sales strength” of different items, on a scale of one to five, with five as the highest rating. The average sales strength for all items is about three and a half. The chicken item with the highest sales strength is strips and tenders, rated at 4.2 by the operators. Chicken breast sandwiches came in at 4.1. Pasta with chicken and fried chicken came in next, followed by Caesar salad with chicken and chicken nuggets. All these are above average in sales strength and give the restaurant operator a wide variety of popular chicken items to put on the menu.
Casual dining restaurants are the American equivalent of the British pub — informal, relatively inexpensive places for lunch or dinner with family and friends. They are the fastest growing segment of the restaurant industry. The category covers a wide variety of concepts, some with a relatively narrow menu focus.
The most prevalent chicken item at casual dining restaurants is chicken wings, served by 66 percent of operations. In the last 10 or 15 years, chicken wings have become a mainstay in casual dining. The effect on producer prices for chicken wings has been most gratifying, to say the least. Then comes the Caesar salad with chicken, at 57 percent, followed by chicken noodle soup, grilled chicken breast, and chicken strips.
If you asked people what the most prevalent chicken at quick service (or traditional fast food restaurants) restaurants would be, they would probably say, “Chicken nuggets.” However, the survey shows that chicken strips are actually the top item in quick service, offered at 87 percent of establishments.
We are optimistic about the continued growth of the foodservice sector. Americans are expected to spend $476 billion in restaurants and other eating places this year. Thanks to continued menu diversification and the vast popularity of certain items, chicken holds a very strong place in foodservice, and we expect our position will continue to grow.
When we look at the picture worldwide, we see that the United States is the largest consumer of chicken. Fewer than 300 million Americans eat substantially more chicken than more than a billion Chinese. We eat about twice as much as more than 400 million Europeans.
International Export Market
As you know, the United States is also very active in the international poultry market. Most of the items I mentioned in foodservice are made from white meat, so we have a ready-made supply of dark meat available for sale in international channels. Chicken leg quarters are the biggest item in our trade with the world.
Brazil now stands as the leading exporter of chicken, a position it achieved just last year. Brazil has shown a steady increase in exports, while United States exports have been up and down due to a problem with avian influenza in recent years and with market disruptions in Russia, our leading export market.
Here is a more detailed picture of exports from the United States. The year 2001 was a very strong year, and we have been holding steady at around 2.2 million metric tons per year since then, 14 or 15 percent of production.
Russia is of course the leading poultry import market. Russia accounts for just under a quarter of all poultry imports in the world, counting both broilers and turkey, while Japan’s share is about 13 percent. Mexico has about 11 percent of the total, while China, the EU-25, and Saudi Arabia each will import about 10 percent. These six account for more than three-fourths of the world’s poultry imports.
RUSSIA — A CLOSER LOOK
Russia is the largest export market for the United States as well as being the largest importer of poultry meat in the world. The market opened to us in the early 1990s, and by the end of the decade, we and other countries were shipping over 800,000 metric tons to Russia. Imports into Russia hit a high point in 2001, with more than one million four hundred thousand tons imported. At the same time, Russia has also imported a substantial amount of the beef and pork consumed by her people.
As far as poultry is concerned, Russia’s dependency on imports stood at 60 percent in 1999 and hit a high point of 82 percent in 2001. Since then, it has declined to about where it stood in 1999. This has not happened because of market forces only, but is the result of a concerted campaign by Russian poultry producers to obtain some protection from imports.
As you can see, domestic Russian production has indeed been growing and imports have been coming down.
The local industry and the Russian government have been working together to modernize the industry, increase domestic production, and reduce imports through a quota system that currently allows just over one million metric tons of poultry to be imported this year. The United States is currently allocated 73.5 percent of that quota. We were not able to fill the quota in 2004 for various reasons. There is absolutely no good reason why we should not be able to fill it in 2005, but the situation is not entirely under our control.
In September 2003, the United States and Russia agreed in principle to a poultry-red meat agreement that would better guarantee the United States a fixed share of the Russian imported meat market. Other countries (including the EU) reached agreements with Russia as well.
For poultry, the agreement provides for the import quota to increase gradually from the current level of 1.050 million metric tons to 1.252 million tons in 2009.
In mid-April, Russian Prime Minister Mikhail Fradkov authorized his trade representative to sign the Russian/U.S. agreement. With the signing of that agreement, the U.S. share of the Russian poultry quota increases to 74.4 percent, which translates to 811,300 tons in 2006. At the same time, the poultry import quota will switch to a tariff rate quota (TRQ). The over quota import duty will be 62.5 percent ad valorem during 2005-2008 and 50 percent in 2009. The in-quota duty remains at 25 percent ad valorem.
OUTLOOK FOR GLOBAL TRADE — BEYOND RUSSIA
Looking beyond Russia to other pieces of the global trading puzzle, I see maturing markets in some countries but real opportunities for increased consumption of poultry in several other countries. While poultry production within a number of those countries will increase and, in some cases, limit opportunities for exporting countries, I see the strong possibility for continued growth in poultry exports.
The ground shifted somewhat in 2004 when Brazil became the number one poultry exporting country by volume. Although the United States is still by far the biggest poultry producing country in the world, I do not see the U.S. regaining its title of number one poultry exporter in the foreseeable future. Brazil has economic advantages that other poultry exporting countries will not likely overcome. The biggest obstacles to continued rapid growth of exports facing Brazil are the potential for poultry diseases disrupting major export markets and the likely push back with trade barriers from importing countries as Brazil’s international market share continues to expand. Of course, all exporting countries constantly face those two problems.
I see the United States continuing to grow, although more slowly, as a poultry exporter. Our best opportunity for continued success may be through increasing the value of our exports rather than quantity. Perhaps U.S. exporters should focus more on value added than on tonnage.
Turning to opportunity markets, China’s potential for being a strong exporter as well as a strong importer continues. I see China improving as a market for non-traditional poultry products such as paws and wingtips. China’s potential as a strong exporter of cooked poultry meat will depend in part on whether Japan continues as a growth market or one that is leveling off.
Recent export data shows that certain countries in Africa are beginning to import more significant quantities of poultry products. While oil money is financing much of this growth in imports, I believe it is a market that has good potential and one that will take more of our abundant supplies of U.S. leg quarters.
India has to be on any list of countries with a strong potential for increasing poultry consumption. Whether India actually opens its market depends on the success of the Doha Round of trade negotiations. If India should move from closed to open market status, poultry exporting countries could enjoy significant growth.
Mexico offers more potential as a trading partner with the United States when import tariffs on leg quarters are reduced over the next few years in accordance with our NAFTA safeguard agreement. Mexico is already our third largest market for U.S. poultry exports.
If stability comes to the Middle East, the poultry import market will become much bigger than Saudi Arabia and nearby smaller countries. The region is likely to continue to be a whole bird market with Brazil being the most likely supplier. However, to the extent that the market becomes more of a parts market, the U.S. will clearly benefit.
Canada’s market potential, like India, depends on the outcome of the Doha Round. If the supply management system for poultry should ever be dropped, we would see a transition to a more open market that would permit exporters with more competitively priced product to benefit. Otherwise, Canada is a good market for the U.S. poultry industry but a known, limited quantity.
Finally, in our roundup of potential opportunity markets, the burning question of the day is whether the EU will open its markets to American poultry. I scheduled this visit with high hopes of a breakthrough, but the issue is still being discussed. You can only imagine my disappointment.
FUTURE OF THE INDUSTRY
The future of the industry in the United States depends in large part on continued strong demand for its products. While consumption in the U.S. is already very high by historical standards, we believe it can go higher as chicken continues to displace red meat in the American diet and as total meat consumption continues to increase. While we expect continued strong consumer demand for chicken, we also are fully aware that chicken must continue to be a good value to consumers. Higher energy costs and the potential for increased feed costs could make it much more difficult for us to provide abundant supplies of chicken at a good economic value.
The biggest constraint on production is simply that our processing plants are running very close to their maximum capacity. Some plants might be able to add an additional processing line, but in most cases this is not feasible. There is just simply not much excess capacity left in the system.
If we are to increase production significantly, companies are going to have to build new complexes from the ground up. Given the cost of land in America today, not to mention concrete and steel, we estimate that a fully equipped, brand-new complex could easily cost $100 million. The question is, can the revenue from 1.2 million birds carry an investment of $100 million? I am sure that many pencils have been worn down to the stub in poultry company headquarters across the United States as the financial gurus try to make that calculation. It may well be that they will try to make do with the production capacity we have, adding only a modest number of new facilities when a company has strong demand from a customer base that must be satisfied.
Also, industry may decide its best interest is served by increasing its focus on further-processed products sold in retail channels. This requires a different and generally smaller investment than new slaughter capacity. The approach here is to “do more with chicken” rather than “do more chickens.”
Any discussion about the future of the industry must mention the related questions of energy and grain prices. The high oil prices we have seen this year could be just the beginning of a period of significantly higher energy prices, which would raise the cost of producing chicken meat primarily through the increased cost of the production and transportation of grain.
Another key future factor is the effect of a successful completion of the Doha Round of trade negotiations. New rules of international trade after the Doha Round are likely to initiate changes in the competitiveness of different countries and regions. Poultry companies all over the world will be facing the need to lower costs and increase value in order to survive increased competitive pressure.
Little did I suspect when I started in the chicken industry that I would stay for more than 30 years. Neither did I suspect that per capita consumption in America would more than double, or that the country that was then the greatest strategic rival of the United States would become our biggest export market for chicken. I have no doubt that the next thirty years will hold just as many twists and turns and surprises. And I have no doubt that the U.S. industry will continue to change and adapt and to prosper in its home market and around the world.