Poultry stocks to gain from lower feedstock prices?

Inter-Pacific Research Sdn Bhd analyst David Lai said that the ringgit

PETALING JAYA: The decrease in corn and soybean prices due to a bumper harvest in the United States, coupled with the slight appreciation of the ringgit against the greenback, will result in cost-saving for the local poultry players.

However, analysts said that it would take some time to be reflected, taking shipment period into account.

Corn and soybean, are the two major components in chicken feed, making up an estimated 80%, with vitamins and miscellaneous supplements making up the remaining 20% of chicken feed.

Feed cost is a significant chunk in a poultry company’s revenue as corn and soybean are imported, while vitamins and supplements are locally-sourced. Generally, feed cost accounts for more than 50% of a poultry player’s revenue.

Inter-Pacific Research Sdn Bhd analyst David Lai said that the ringgit’s slight appreciation against the US dollar would augur well for poultry companies, as imported feed components are denominated in US dollars.

“Sure, poultry companies can enjoy a slight relief in terms of production costs. But if the ringgit is able to appreciate to RM4 against the US dollar, then there would be greater savings,” says Lai.

The two significant segments of the poultry industry are eggs and broilers, the latter referring to chickens bred for meat production.

An analyst explained that in the first half of the year, the market has been facing an oversupply of eggs, and this situation is expected to carry on until year-end.

“This is due to a wave of poultry players expanding their egg production. The supply growth of eggs has outpaced demand, which in turn pushes prices down,” he says, adding that there would be a time lag between three and six months, before poultry companies could see if the lower corn and soybean prices would benefit them significantly.

However, for poultry companies including QL RESOURCES BHD, which produce their own feed and trades in feed, the effect of the low corn and soybean prices would not impact them significantly.

According to a recent analyst report on TEO SENG CAPITAL BHD, the average egg price has been trending lower since June 2015, from a high of 36.2 sen to 28.3 sen last week.

Lai said that egg prices were expected to be higher next year compared with the lower prices from the oversupply this year.

Cyclical trends show that egg prices tend to increase towards year-end, due to festive seasons like Christmas and the Chinese New Year. “To address the oversupply of eggs, many poultry players have culled stocks eight weeks before the end of the usual 85-week life cycle,” said Lai.

Meanwhile, for broilers, prices have been trending upwards and the trajectory is likely to continue, going forward.

Lai explained that the savings from lower feed cost would result in profit margin expansion for broilers.

“Broiler prices are not inclined to decline, as poultry companies that produce broilers are price takers, not price movers. The price of broiler chickens will follow demand of broilers,” he says.

Broiler prices at farm hit a five-year high of RM6.80 in August this year, recording higher average year-to-date prices this year compared with the previous year.

Analysts said that the low corn and soybean prices were not expected to generate large savings for poultry companies, particularly in the short-term, but they signified a change of trends in the local poultry industry.