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BR Research

An interview with Khalil Sattar, chairman Pakistan Poultry Association

“Price control will be the final nail in industry’s coffin” Over the last year, BR Research has documented ...
Published June 14, 2021
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“Price control will be the final nail in industry’s coffin”

Over the past year, BR Research has documented the volatility in domestic poultry prices, forewarning the disruption it has since caused for industry’s sustainability. Recently, the Competition Commission of Pakistan also conducted an inquiry into poultry value chain, finding collusion over price-setting by some players.

To help answer what’s really going on, BR Research met with Khalil Sattar, founder and CEO of K&N's, a fully vertically integrated poultry enterprise. Formed in 1964 by Sattar, K&N's success has been featured in a Harvard Business School case study. Beyond K&N’s, Sattar has also been extensively involved in efforts for industry’s development and is considered a pioneer by many. He has also served as a consultant for FAO in Pakistan.

Sattar is the Chairman of Pakistan Poultry Association (PPA), the representative trade body of all segments in the poultry value chain. He answers questions surrounding the price spiral over last year, and what the government needs to do – or rather not do - to allow industry’s sustained growth. Below are the edited excerpts:

BR Research (BRR): Can the massive increase in poultry prices simply be attributable to increase in input costs? Especially at a time when demand from commercial customers was severely suppressed due to lockdowns.

Khalil Sattar (KS): No immediate relationship exists between cost of production and market prices of poultry products. Poultry is a sensitive, perishable category where producers cannot raise prices immediately in response to rising production cost. In fact, the industry works like any other: producers incur losses when margins are squeezed; few players lower production, while others are pruned out. This creates a supply shortfall, raising market prices.

Last 1.5 years have brought extreme disruption in the poultry industry. Before March 2020, poultry production was increasing at a healthy rate as profitability outlook looked generally positive. Unfortunately, with the onset of Covid-19, fearmongering became rife on mainstream and social media that the virus was spreading through chicken consumption. Soon after, commercial demand also suffered a massive setback when weddings and social gatherings were indefinitely banned, even though lockdowns were eased intermittently.

Naturally, supply could not remain unchanged when demand is so severely choked for extended period. This pushed poultry farmers on the side lines, and many simply stopped raising fresh flock of Day-Old Chicks (DOCs). DOC prices, which typically oscillate between Rs 20 – Rs 40, crashed all the way to Rs 2 per chick. Yet even those prices could not entice broiler farmers to scale up production, because the feed cost alone was greater than market prices.

This has been a difficult period for the industry. Hatched chicks were released in open fields, while hatching eggs were sold for table. Most importantly, parent birds – which are expensive and are equivalent to machinery for the industry – were sold for meat, because chicks were no longer in demand.

BRR: News from the farms suggest that the ranikhet disease outbreak has also hurt supply. Is that correct?

KS: Yes, luck has simply not been on our side. Newcastle disease (locally known as ranikhet) is endemic in Pakistan and many other countries. In fact, disease outbreaks happen routinely throughout the year. However, the recent outbreak was of a highly virulent strain called viscerotropic and neurotropic velogenic. This variant has a high mortality rate for chickens, although it does not have any harmful effects for human consumption.

BRR: If the disease has already been prevalent in the past, does the industry not have established protocols to control its spread?

KS: Most farms maintain bio-security and have regular vaccination programs, but outbreaks depend upon the intensity (virulence) of the virus.

Protocols dictate that any disease outbreak must be immediately reported to the government lab, which confirms the status to the provincial Poultry department. Eradication programs adopted by other countries require that once Newcastle outbreak is notified, flock of infected birds be culled and farmers paid full compensation, which helps prevent further spread. Moreover, government also pays for disinfecting farm premises. Globally, disease control is government’s responsibility; and it cannot happen any other way in Pakistan either.

BRR: That seems like a reactive measure. Can preventive steps not be taken ex-ante?

KS: If farms have not been established at minimum distances, the disease can easily spread to other farms in the neighbourhood.

When the bird flu outbreak occurred, the industry demanded that minimum distances be stipulated between poultry farms. Only Punjab government made it mandatory, and that too for new farm constructions only.

Thousands of farms that had mushroomed in close proximity during the preceding decades could not be demolished. The only option for a farmer is to rent out other poultry farms in the vicinity and keep them empty, which is not a commercially viable proposition.

We are still trying to push similar regulation in other provinces, but so far to no avail.

BRR: You stated that poultry infected with Newcastle disease has no harmful effects for human consumption. If this is scientifically established, why has the poultry industry not communicated so through media campaigns?

KS: The poultry industry has run awareness campaigns through TVCs and print advertisements to educate consumers. However, because poultry industry is a commercially-interested party, sponsored campaigns are rarely viewed without suspicion by the public.

On the other hand, the ill-informed conversation currently taking place on mainstream and social media has whipped up frenzy. Although the public attaches credibility to communication through news outlets, it is unfortunate that these they helped popularize myths about safety of poultry consumption.

It must be understood that by raising suspicion regarding safety of chicken consumption, media is not just dissuading consumers from buying poultry products. It is also dissuading poultry farmers from raising flocks for the next cycle. Later if prices rise again, the administration will blame the industry for collusion.

Here the government has a role to play. When bird flu spread across East Asian poultry farms, the president of Thailand visited a KFC restaurant and ate chicken on live TV. Pakistan’s political class also needs to display courage in a similar fashion.

Instead, the industry has repeatedly submitted applications to the Animal Husbandry Commission, requesting the department to issue clarification that Newcastle disease (ranikhet) does not affect human consumption. Sadly, no clarification has been issued to date.

It seems the administration has a single-minded obsession with reducing food prices, with zero inclination to invest itself in market development.

BRR: Poultry prices skyrocketed soon after ban on social gatherings was lifted. Do you agree that administrative measures are needed to bring prices under control?

KS: Unfortunately, the administration does not appreciate the gravity of the crisis ahead. There are talks of imposing controls on poultry feed prices, which will be the final nail in the industry’s coffin. In the case of pharmaceutical industry, we have already witnessed how price revision takes years due to red-tapism. Price controls will put the feed industry out of business; those who survive may reduce feed quality to maintain profitability.

We have been fighting this mentality for several decades. Back in 1980s, the government wanted to fix feed prices by supplying maize at a discounted price, as the country was importing maize under PL-480. The industry opposed subsidy even then, as maize is not the only component in poultry feed. And price ceiling would have forced producers to reduce use of other quality inputs.

Periodic changes – whether on weekly or monthly basis – indicate that broiler chicken and farm eggs prices are purely market-determined. Prices exhibit high degree of variation and seasonality-effects, which would not be the case if there were any collusion between producers for price-setting. For example, farm eggs prices decline during summer vacations when schools are off.

The finance minister claims that administrative measures have reduced prices, which is disingenuous. Administrative measures cannot reduce prices for a sustained period. Of course, government can forcibly reduce market prices by threatening or coercing sellers. However, if producers are forced to sell below their cost price (through coercion), they will scale back investment for next flock, instead of continuing to bear losses for more than one or two cycles.

The gestation period of broiler chicken is 35 days, along with two weeks of clean up time. Even under ordinary circumstances, when a farmer bears losses in successive flocks, he refuses to raise the next flock of birds. Sooner or later, administrative measures will exacerbate the existing shortfall in supply, leading to further increase in market prices.

Government must learn from the mistakes it has already made by controlling prices of wheat. The adverse effects of price controls in wheat market are already well-documented. Price control breeds corruption and render industries uncompetitive. Once subsidies are removed, industries collapse. The poultry industry does not want to stand on clutches. Thus, it must be allowed to operate and grow freely as it has for the past 50 years.

BRR: But national average retail prices have already fallen by over 40 percent during last four weeks, after the government took notice of the abnormal rise.

KS: Over past 10 days, DOC prices have fallen from Rs 75 to Rs 35 per chick. That’s not an outcome of price controls. We are five weeks away from Eid-ul-Azha, when broiler demand usually plummets. Farmers are no longer willing to purchase DOCs at old prices; thus, hatcheries must lower prices even if it means incurring losses. This is a routine phenomenon as evidenced by historic price trends. It is asinine that the administration believes it has scored a win against the “poultry mafia”. How will they explain the situation when prices rebound after few months?

BRR: DOC price movement over past year indicates that it is a pass-through element for broiler farmers.

KS: That’s incorrect. DOC and broiler prices move in tandem with each other, albeit with a lag. If DOC supply becomes short – for example, due to disease outbreak - it reduces broiler supply, which in turn raises prices for both output (broiler) and inputs (DOC).

BRR: Poultry products have become a kitchen essential and cheapest source of protein in a country where malnourishment is already widespread. Surely, no political government can sit tight when prices surge abnormally.

KS: Unfortunately, the officialdom does not appreciate how beneficial a freely functioning poultry industry has been for the economy, and society at large. Deflated prices of poultry products today are 18 percent cheaper than they were 10 years ago, even though 65 percent of poultry feed inputs are import-based (in value terms).

Over the years, the industry has massively improved its efficiencies, with zero support from the government. Global biotech companies that supply grandparent and parent birds have ushered a revolution through genetic and nutritional improvements. Thanks to the extension services provided by these companies, more than 60 percent of local poultry production takes place on breeder and broiler farms that have computerized modern houses, with full atmospheric controls such as wind and temperature controls. Biotech companies also provide crucial information regarding optimal nutritional composition such as protein, energy ratio, essential amino acids, minerals, and vitamins required in the feed that has helped us improve productivity.

BRR: CCP’s inquiry claims that feed prices rose by 32 percent over past 2 years. A high share of this increase occurred long before the recent global commodity price surge. Do you agree that feed companies have achieved abnormal profits in recent years?

KS: If feed companies were earning abnormal profits, it would have led to expansion and entry of new players in the segment, not closure of existing firms. Nearly 30 feed milling companies have gone out of business in the past 6 months alone, which includes some of the biggest names in the industry.

Remember, 65 percent of poultry feed price is based on imported feed ingredients and feedstuffs. These include soybean, canola, amino acids, vitamins, and minerals. Prices of these commodities had already increased by over 30 percent pre-Covid due to currency depreciation. Wholesale price of maize – which is produced domestically - had also been on a rise due to growing local demand from poultry and silage industry, as well as due to increase in prices of imported seeds. Moreover, poultry value chain has faced increase in freights costs, and tariff increases for electricity and other utilities, much like any other industry.

The feed milling segment has been struggling to keep its head above water, not earning abnormal returns. Most of these companies also operate hatcheries. Since the pandemic hit, the hatchery business has also recorded massive losses due to frequent busts in Day Old Chicks (DOC) prices during past 1.5 years.

BRR: Why have one-time losses in the hatchery business led industry wide shutdown of feed mills altogether?

KS: Feed milling and hatchery businesses usually operate as one-window operation because their buyer is the same: commercial poultry/broiler farms. Most firms supply 60 to 90-day credit to poultry farmers, which in the past had worked out well for both parties because the industry was on a growth spurt. But the volatility in prices over past year meant that many broiler farms defaulted on their payments. In turn, many feed mills that were leveraged to their teeth had to shut down operations, as they could not meet their obligations to banks.

BRR: Is it possible that these commercial losses may have led some feed mills to collude over prices to keep their heads above water?

KS: That’s overly simplistic. In most industries where no single player controls the market, firms follow the price leader in raising prices. Moreover, efficient players have no incentive to undercut competition if they do not have the capacity to increase volume sold by maintaining low prices.

The Pakistan Poultry Association is the representative registered trade organization of all the players in the poultry value chain. As industry chairman, I can confirm that no meetings take place at the association level for price-setting. If CCP unearths isolated evidence of collusion between individual parties, the law must take its course. So far, CCP has only issued show cause notices to parties, but the guilty verdict has already been announced through press releases, which is highly unfortunate.

BRR: In his post-budget briefing, the finance minister claimed to have extended tariff exemptions on import of poultry feed components. Do you expect feed prices to stabilize going forward?

KS: In its several meetings with Commerce Ministry, the industry had recommended reduction in import duties for several input items, some of which have been accepted. However, the impact of duty reduction has been more than nullified by increase in sales tax.

As per the budget document, sales tax has in fact been increased on import of poultry feed ingredients. GST has been raised to 17 percent on various items that previously had nil or 10 percent tax rate.

BRR: What are your recommendations to the government to bring back sustainable growth for the industry?

KS: The industry does not seek any financial incentives from GoP in the form of subsidies. However, unnecessary intervention such as fixing of input, ex-farm, wholesale, or retail prices will exacerbate the effects of ongoing disruption. Existing players will scale back investments in productivity and expansion, while quality of feed inputs will decline. Evidence from several other industries shows that excessive government controls lead firms to under-report their business volume or resort to other means to maintain profitability.

The industry must be allowed to ride out the ongoing volatility cycle, as demand and production re-adjust to new price levels. Fixing feed prices will be a grave and irreversible mistake, especially at a time when price of imported inputs such as soybean have nearly doubled globally.

No government in the world has been successful in controlling Day Old Chick and live broiler prices. Federal and provincial governments must also avoid any such temptation. Such an experiment will be disastrous for both the poultry industry and the consumers.

Furthermore, if price ceiling is imposed on live chicken products at district administration level, it will further widen the premium between prices of packaged and unprocessed meat. This may push the price conscious, on-the-fence consumers back to unprocessed market.

Similarly, the federal budget for FY22 has not exempted poultry industry from sales tax on machinery import. This means the amount of initial investment will also increase by 17 percent, discouraging expansion.

So far, poultry industry in Pakistan has been following in the footsteps of industry evolution globally. The market size of local poultry industry has been expanding between 8 to 12 percent per annum for past several decades. Moreover, the number of players in the value-added industry and the volume processed by them has also been on the rise.

Around the world, poultry prices are volatile wherever live chicken and wet market flourishes, as can be seen in case of other regional examples such as India and Bangladesh. In order to minimize price volatility, government must encourage conversion of perishable commodities to non-perishable products such as packaged/frozen meat. Moreover, policy decisions must be taken to support the long-term trend towards value-addition, not inhibit it.

© Copyright Business Recorder, 2021

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