Poultry players up in arms over extension of price control scheme

This article first appeared in The Edge Malaysia Weekly, on January 10, 2022 - January 16, 2022.
Since October 2020, animal feed costs have gone up by 30% to 35%, and feed costs constitute about 70% of the production costs of chicken and eggs

Since October 2020, animal feed costs have gone up by 30% to 35%, and feed costs constitute about 70% of the production costs of chicken and eggs

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THE government’s move to extend price controls on chicken and eggs under the Malaysian Family Maximum Price Scheme from its original end date of Dec 31 last year to Feb 4 this year has poultry players up in arms, as they are already grappling with production costs that have shot up by a considerable 30%.

Companies, particularly smaller ones, that do not have the economies of scale cannot shoulder the burden of a price cap that is below the industry’s production cost, caution industry players, who also want prices to be determined by market forces.

The players contend that the move is unfair without corresponding subsidies and will inflict substantial damage on the industry and impact on the country’s food security.

The scheme, which is meant to stabilise the prices of necessities by imposing a ceiling price on 12 types of items including chicken, eggs and vegetables such as long beans, tomatoes and choy sum, was to run its course from Dec 7 to Dec 31 last year, but was extended to Feb 4.

In a statement last week in response to the extension, Federation of Livestock Farmers’ Associations of Malaysia (FLFAM) said the industry is “shocked and disappointed” by the move, which has led to a drop in chicken and egg prices.

“The rising cost of chicken and egg production is real and the industry is still suffering losses. In addition, the industry is still waiting for financial assistance such as soft loans or feed cost subsidies from the government.

“With the heavy pressure from ex-farm price controls on the broiler and egg industry, it is very likely that some parts of the industry, especially the small and medium farms that have suffered huge losses, will have to stop operating in the coming months,” says FLFAM.

A poultry industry veteran, who spoke to The Edge on the condition of anonymity, says on the whole, the cost of production for chicken and eggs has gone up by 30%.

“Since October 2020, animal feed costs have gone up by 30% to 35%. Corn makes up about 50% of feed costs, and soybean meal makes up about 25%. Both corn and soybean meal are fully imported products from Argentina and Brazil, and since October 2020, the cost of corn has shot up by more than 60%, while soybean meal prices have gone up by more than 40%.

“Feed costs constitute about 70% of the production costs of chicken and eggs, and if you bundle that together with labour and transport costs, the overall cost of production has gone up by 30%. Our industry is also highly reliant on foreign labour, and it’s not easy to get workers now because of the Covid-19 situation,” he tells The Edge.

On the imposition of the price control scheme, the veteran says that for industry players, it is an unjustifiable and unfair move.

“When you impose ceiling prices, you are not letting prices be dictated by market forces. If you want to impose ceiling prices, you have to come up with some form of subsidy, like what is being done for sugar and flour manufacturers. Otherwise, how can the industry survive?” he asks.

Higher feed costs take a toll on company earnings

Surging prices since October 2020, in both corn and soybean meal prices have left a negative impact on poultry companies, which utilise the commodities for animal feed.

A quick check on the financials of 10 poultry companies listed on Bursa Malaysia shows that higher feed costs have led to significant year-on-year declines of 22% to 29% in year-to-date earnings for some companies. For others, the burden was just too much to bear, pushing them into losses.

Leong Hup International Bhd group chief financial officer Chew Eng Loke says the group experienced margin compressions last year because of the increase in raw material costs.

“The increase in the cost of raw materials was faster than pass-through to customers who were suffering from weakened demand due to the Covid 19 pandemic. The issue has now been largely resolved with higher vaccination rates achieved across the region. We are looking to better days ahead as economies reopen,” he tells The Edge in an email response.

On how the extension of the price control scheme would impact Leong Hup’s financial performance, Chew says the group has farms located across the country, and thus the economies of scale to operate efficiently.

“The price of chicken set by the government is above Leong Hup’s cost of production; thus, we will be fine financially. Besides, Leong Hup is geographically diversified across five countries in the region with Malaysia contributing about 30% of group revenue,” he says.

Another of the larger players, QL Resources Bhd, in an email response says the poultry industry has been hit, and continues to be hit badly by the events of the past two years with the Covid-19 pandemic taking centre stage.

“The industry is bleeding from the high production costs stemming from increased labour and exorbitant feed costs, with the skyrocketing prices of corn and soybean meal. This is before taking into consideration overheads such as utilities, logistics and supply chain challenges.

“The continuation of such a scheme will worsen an already untenable situation. Nobody can or will continue to produce under such prohibitive conditions. Some poultry producers will be unable to cope with the crippling losses and cease operations. This will affect the overall supply of poultry (broilers and eggs) in the country and impact Malaysia’s food security,” the group says.

The group adds that the price control scheme is “killing the industry by setting a ceiling price that is below production cost”.

“Producers cannot even break even. They have been absorbing the losses and subsidising the production of an important protein source for the nation but the situation cannot prolong.

“We hope poultry prices will be left to market forces (demand and supply) to determine the price equilibrium, without interference. Let the price be market-driven.”

 

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