LISTED companies in the poultry business remain under pressure following the continued rise in raw material prices.

       The sustained increase in soybean and corn prices have led to this condition – a problem which does not seem to be going away anytime soon.

       “The increasing input costs for poultry farming is a global phenomenon. The high cost is inevitably affecting all poultry players given that feed is the key cost to farming,” says TA Research’s analyst Jeff Lye.

       Adding to the pressure on poultry players is the recent government move to cap the price of chickens and eggs for five months from February to give consumers a reprieve from poultry-price inflation.

       However, Lye points out that the ceiling price imposition is counterbalanced by the government’s subsidies to the poultry industry during the period.

       Despite this, the rising input costs will likely continue to cast a shadow on the financial outlook for the companies.

       Bursa Malaysia-listed companies which are involved in the poultry industry include Leong Hup International Bhd (LHI), LTKM Bhd, Lay Hong Bhd, QL Resources Bhd, Teo Seng Capital Bhd and CCK Consolidated Holdings Bhd.

       Some of the companies have other businesses that are parked under the listed entity.

       “The poultry companies’ financial outlook is currently hampered by the higher feedstock and logistic costs, coupled with the imposition of the price ceiling. The prices of main feedstocks such as corn and soybean have increased by 44.12% year-on-year (y-o-y) and 25.40% y-o-y respectively,” an MIDF Research analyst tells StarBizWeek.

       “The substantial increase has resulted in margin compressions of poultry companies under our coverage.

       “In the recent quarter, we saw earnings decline by 20% to 27%,” says the MIDF analyst.“Global corn and soybean prices were up more than 40% y-o-y in 2021 and in the year-to-date for 2022, the prices are still extending its uptrend owing to various uncertainties globally,” Lye tells StarBizWeek.

       This has started to affect the profit margins of both QL’s integrated livestock farming (ILF) segment and LHI’s livestock feed business segment, according to Lye.

       “Margins contractions are seen in QL and LHI specifically. But bear in mind, some periods of the reported financials were during a time when the economy was affected by the lockdowns with dine-in services being banned,” Lye says.

       “If this does not repeat, it is likely that any future (cost) pass-through planned would work better for the poultry companies,” he adds.

       Any cost pass-through mechanism will work better in a situation when the economy is running without movement control restrictions.“For instance, when Malaysia underwent a nationwide reopening, the prices across all poultry products increased accordingly,” Lye says.

       On Thursday, QL reported its third quarter ended Dec 31’s net profit falling to RM59.79mil from RM76.33mil in the same quarter a year ago.This is despite QL’s revenues rising by some 26% y-o-y to RM1.4bil with its bottom line being compressed or weighed down by its ILF segment on higher production costs.

       Commenting on the ceiling price that was imposed recently, Lye says this can affect the long-term sustainability of the poultry industry.“The imposition of ceiling prices should be discussed with the industry. In Malaysia, I believe this is fairly well-discussed between the producers and the government. As a result, the government has a good understanding of the situation and the costs borne by poultry companies,” he says.

       Notably, the saving grace is the subsidies for both eggs and broiler for the companies during the period when the ceiling price is in force.“This should help aid farming companies in relieving their cost burden and help consumers facing food inflation. But I think changes to the approved permits (APs) might not have much price impact to the industry other than having to meet some local market demands,” Lye says.

       It was reported that the government had recently allowed all AP holders to import whole chickens compared with certain parts previously and it is also offering APs for hypermarkets to import chicken to help balance the supply-demand equation.

       Commenting on the development, the MIDF Research’s analyst says that allowing more AP holders in the industry will increase competition.

       “This will help to keep the price of chickens at an affordable level. However, this would only be possible if there is no price ceiling and prices are determined by market forces,” says the analyst.

       “The introduction of a price ceiling will affect the companies’ earnings as the industry is also grappling with a significant increase in feedstock and logistics costs,” the analyst adds.

       The MIDF Research analyst also suggests that poultry companies be more prudent in their hedging techniques to help minimise the rising feedstock costs.

       This can be done through dealing in futures contracts to manage their feedstock supplies. Some poultry companies are already doing this, according to the analyst.

       Lye says some companies are formulating animal feed recipes with alternative raw materials such as rice bran or tapioca to cope with cost increases.

       “It does help to alleviate some of the cost rises but ultimately almost all input materials are increasing in prices albeit at different quantum. So there is only so much that can be done before an effective cost pass-through to the consumer becomes necessary eventually,” Lye says.