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Competitiveness of the EU egg and poultry meat sector

Published: October 18, 2014
By: Peter van Horne (LEI Wageningen UR. the Netherlands)
Summary

EU poultry meat and egg producers have to comply with legislation on environmental protection, animal welfare and food safety. This legislation has increased the production costs of poultry meat and eggs. At the same time the EU is negotiating with other countries or groups of countries to liberalise trade in agricultural products. This paper examines how lowering import levies impacts the competitiveness of the EU poultry industry.

The results on the egg sector show that the offer price of whole egg powder in 2012 of some third countries is close to the average EU price. Despite the current import tariffs on whole egg powder, the third countries can be competitive on the EU market. In a scenario with a 50% lower import tariff, Ukraine, USA, Argentina and India have a lower offer price of whole egg powder compared to the EU egg industry.

The results on the poultry meat sector show that the offer price of broiler breast fillet in 2011 of some third countries was already below the average EU price. Despite the current import levy on breast fillet, Brazil and Argentina are competitive in the EU market. In a scenario with 50% lower import levies and no additional levy, Brazil, Argentina, the USA, Ukraine and Thailand have a lower offer price for breast fillet than the EU poultry meat industry.

Keyword: competitiveness, production costs, poultry, economics, international trade

 

Introduction
Companies in the EU poultry meat and egg supply chain have to comply with European legislation on animal welfare, food safety and environmental protection. While the legislation aims to guarantee a qualitatively good poultry production, it also confronts the sector with extra costs. Countries outside the EU do not have the same extensive legislation. At the same time, the EU is involved in multilateral negotiations with the World Trade Organisation (WTO) and bilateral negotiations with different partners including India, Ukraine, Mercosur and the USA, both of which are intended to further liberalise trade by reducing or abolishing import levies. This causes concerns within the EU on its competitiveness in the poultry industry. In this paper the results are presented of two studies to provide insight on the competitiveness of the EU poultry sector. 
Method
To compare the competitiveness first of all the production costs of eggs and poultry meat for all relevant countries were calculated. For egg production the countries in the comparison were: the Netherlands (NL), France (FR), Spain (ES), Italy (IT), United Kingdom (UK), Poland (PL) and Denmark (DK) and the non-EU countries: Ukraine (UKR), the USA, Argentina (ARG) and India (IND). For poultry meat the countries in the comparison were: the Netherlands (NL), Germany (DE), France (FR), the United Kingdom (UK), Italy (IT), Spain (ES), Denmark (DK), Poland (PL) and Hungary (HU), and six non-EU countries: the United States of America (USA), Thailand (THA), Brazil (BRA), Argentina (ARG), Russia (RUS) and Ukraine (UKR).
For eggs in all countries data were collected on prices (feed, young hens), technical results (egg production, feed intake, mortality), investment (poultry house, cages) and other costs (interest rate, labour, manure disposal). For egg processing, data were collected on investment in buildings, equipment and labour cost. The base year for the data was 2010. The total costs were converted to euros with the average exchange rate in the year 2010. Based on the 2010 results, the situation towards 2012 was extrapolated. For 2012, account was taken of the implementation of enriched cages, being the minimum standard for egg production within the EU from 2012. Based on extensive calculations, it was concluded that the production costs of eggs produced in enriched cages, compared to conventional cages providing 550 cm2 per hen (EU minimum standard from 2003), increased by 7%.
For poultry meat in all countries, data were collected on prices (feed, day-old chicks), technical results (growth rate, feed conversion, mortality), investment (poultry house, equipment) and other costs (interest rate, labour, manure disposal). For slaughterhouses, data were collected on investment in buildings, equipment and labour costs. The base year for the data was 2011. The total costs were converted to euros with the average exchange rate in 2011. Based on the situation in the base year, three scenarios were developed:
  • a change in import levy. A 50% reduction of the basic levy to illustrate the result of any multi- or bilateral agreement of the EU;
  • lower exchange rate for the currency of the non-EU countries. In the scenarios, a 10% lower exchange rate was assumed;
  • combination: 50% reduction of the import levies plus a 10% lower exchange rate. 
Results eggs
The production costs of shell eggs produced in conventional cages in the EU in 2010 was on average 84 eurocents per kg of eggs. Between the main egg producing countries, the production costs of shell eggs in 2010 ranged from 88.8 eurocent per kg of eggs in the UK and 89.3 in Denmark to 79.0 in Spain and 78.2 eurocent per kg of eggs in Poland. Compared to the average level within the EU, the production costs for shell eggs in 2010 were lower in Ukraine (79%), USA (75%), Argentina (72%) and India (81%).
For whole egg powder the illustrated non-EU countries were also competitive. Compared to the average level within the EU, the production costs of whole egg powder in 2010 were lower in Ukraine (79%), USA (80%), Argentina (75%) and India (80%). Because the cost of transportation of powder is low, the offer price of whole egg powder from third countries is relatively low. However, current import tariffs protect the EU from large amounts of imports from the illustrated countries.
In the EU, egg producers have to comply with European legislation covering environmental protection, animal welfare and food safety. The total costs of European legislation based on the situation in 2012 is estimated to be more than 15% of the total production costs to produce eggs at farm level.
In Argentina, India and Ukraine there is no legislation on animal welfare and laying hens are housed in conventional cages with a space allowance of 300 to 400 cm2 per hen. Between countries, regions and farms the density can change due to expected market prices. Literature shows that purely from an economic point of view 300 to 400 cm2 per hen gives the highest income for the egg producer.
The results for the situation in 2012 are presented in Figure 1 and Figure 2. Figure 1 provides the production costs of whole egg powder in the EU after implementation of the EU welfare Directive 1999/74/EC and the addition of transportation costs and the current import tariff compared to Ukraine, the US, Argentina and India. Figure 1 shows that import tariffs protect the EU from large volumes of imports from third countries.
Figure 2 illustrates the 'worst case scenario' with a 50% decrease in import tariff and a 10% devaluation of the exchange rates for the non-EU currency. In this situation all third countries have a lower offer price of whole egg powder compared to the EU egg industry. In this situation large volumes of whole egg powder will be imported from third countries. 
Figure 1 Offer price of whole egg powder in Germany from EU average (horizontal line) and non-EU countries in cents per kilogram in 2012
Competitiveness of the EU egg and poultry meat sector - Image 1 
Figure 2 Offer price of whole egg powder in Germany from EU average (horizontal line) and non-EU countries in cents per kilogram based on scenario 3: 50% lower import tariff and 10% lower exchange rate
Competitiveness of the EU egg and poultry meat sector - Image 2
Results poultry meat
The production costs of broiler meat have been calculated for nine EU countries. After slaughter the production cost for these countries ranged from 154 to 182 eurocents per kg of carcass with an average of 166 eurocents per kg. In comparison to EU countries, the production costs after slaughter are significantly lower in most non-EU countries such as Argentina (71% of EU average), Brazil (72%), Ukraine (77%), USA (80%), Thailand (84%) and Russia (92%).
In the EU poultry meat producers have to comply with European legislation. The additional costs of EU legislation on farm level were estimated to be 4.8 eurocents per kg of live weight (5.1% of the total production costs in 2011). Table 1 gives an overview of the regulation and political and societal interest of environmental, food safety and animal welfare issues in some non-EU countries. 
Tabel 1. Regulation in selected non-EU countries (Brazil, Argentina, USA and Thailand)
Competitiveness of the EU egg and poultry meat sector - Image 3
 
The EU is a large importer of poultry meat. Imports of breast fillet mainly come from Brazil and Thailand. Salted breast fillet is imported within quota at an import levy of 15.4%; 210,000 tonnes in 2012. Cooked breast fillet is imported within quota at an import levy of 8%; 237,000 tonnes in 2012. Natural breast fillet is a small quota and imports occur outside the quota. At import, an import levy of €1.02 per kg has to be paid with in recent years an additional import levy (safe guard) of €0.30 to 0.40 per kg. Despite these high import levies, the poultry meat imports are competitive, and in 2012, 104,000 tonnes of natural breast fillet was imported. After the introduction of import quotas in 2007, the total imports of poultry meat have not further increased.
The results for the situation in 2011 are presented in Figure 3 and Figure 4. Figure 3 lists all cost components for breast fillet in order to compare the EU average offer price of breast fillet to that of six selected non-EU countries. Figure 3 clearly shows that import levies protect the EU from imports from the non-EU countries. However, even with the substantial import levies, the offer price of breast fillet from Brazil and Argentina is below the offer price of EU producers. 
Figure 3 Offer price of breast fillet in Germany from EU average (horizontal line) and non-EU countries in eurocents per kilogram in 2011
Competitiveness of the EU egg and poultry meat sector - Image 4
The combined consequences of a 50% lower levy on imports (and no additional levy) and 10% lower exchange rates are indicated in Figure 4. In this worst-case scenario, all third countries obtain a competitive to strongly competitive position in the EU market for breast fillet, and they will export large volumes of poultry meat to the EU. 
Figure 4 Offer price of breast fillet in Germany from EU average (horizontal line) and non-EU countries in eurocents per kilogram with 50% lower import levy, no additional levy and 10% lower exchange rate
Competitiveness of the EU egg and poultry meat sector - Image 5
Conclusions
Possible changes in European import levies will greatly weaken the position of the European poultry sector. The scenario study has shown that if the import levies were to drop by 50%, competing countries from outside Europe would be able to sell chicken breast filet or egg powder at a price considerably lower than that of the European producers. Due to European regulations in the fields of the environment, animal welfare and food safety, the production costs of poultry meat and eggs in the EU are higher than in other parts of the world. The EU is currently in negotiations with various non-EU countries regarding the liberalization of trade in agricultural products. Both aspects have a negative effect on the global competitiveness of the European poultry sector. Research reports are available on the poultry meat sector (van Horne and Bondt, 2013) and egg sector (van Horne, 2012) 
References
Horne, P.L.M (2012). Competitiveness of the EU egg industry. LEI Wageningen UR. Research Report 2012-065. The Hague, the Netherlands. November 2012.
Horne, P.L.M and N.Bondt (2013). Competitiveness of the EU poultry meat sector. LEI Wageningen UR. Research Report 2013-068. The Hague, the Netherlands. December 2013.
Related topics
Authors:
Peter van Horne
Wageningen University & Research
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