Eggs - Not So Fragile Profits! March 2018 issue

Eggs - Not So Fragile Profits!

Egg is probably one of the few food items that provides wholesome nutrition at an affordable price. And that is what makes it a must-have at breakfast tables across the globe. Indian egg producers, with a low-cost production base, can use this craving to their advantage and make money by shipping it out of the country.

Sisir Pradhan | February 2016 Issue | The Dollar Business

Indian egg producers, with a low-cost production base

Amidst all the pomp and celebration of ‘India shining’ story, there is a darker side which consists of a large portion of the country’s population which can’t afford to fulfil is daily nutrition requirement. According to a World Bank report, India is among the countries with a high rate of malnutrition among children. The biggest challenge for leaders in India and other developing countries is to provide balanced food at nominal prices. And egg is probably one of the few foods which fits the bill as it provides wholesome nutrition at an affordable price compared to other products of equal nutritional value.

While the demand for egg in developing economies is attributed to its value-for-money benefit, it is high protein content that makes egg a must-have item in the developed nations. While Germany is the largest egg importing country with a market share of about 15% of global egg imports (both in eggs in shell and dried categories), Netherlands remains the top exporter with almost 21% share in terms of eggs in shell form (ITC HS Code 0407) and 28% in eggs in dried form (HS Code 0408). India’s share in both these categories, on the other hand, is way below 5%. Egg being a perishable item, is transported at a stable temperature of 2 degree Celsius, hence export of the product from Netherlands and US (the second-largest exporter of eggs) is largely to countries in Europe.

In terms of production, India fares better. Of course, China’s love for eggs (to be used in quick serve food items) makes it the largest producer with an annual production of 24.5 million tonne. In the second spot is US, with an annual production of 5.6 million tonne. Then follows India, with annual production of over 3.6 million tonne eggs. However, given India’s lower comparative annual per capita consumption of an average 35-40 eggs as compared to 250 eggs in US, a large part of eggs produced in India is shipped out of the country.

The Golden Era

The co-operative movements in India in the food and agriculture sector played a key role in narrowing the gap between production and demand. While the co-operative movement of the 1970s, spearheaded by Verghese Kurien made India one of the largest producers of milk in the world, the efforts of Dr. B. V. Rao, the architect of Indian poultry industry, generated interest among farmers to take up poultry farming. In the early 1980s, there was a drastic fall in poultry production in the country – reason being low prices offered by traders to poultry farmers. While raw material costs – particularly of feed – had increased significantly, prices offered by traders to poultry farmers were way below production costs and that resulted in poultry sector farmers suffering losses and eventually making exits from the sector. It was during this time that Dr. Rao and farmers in the poultry sector joined hands to form the National Egg Co-ordination Committee (NECC; in May 1982), which since then has been fixing benchmark prices for egg. Today, more than 25,000 poultry farmers are associated with NECC which makes it the single-largest association of poultry farmers in the world. It was due to the marketing initiatives of NECC – remember the popular jingle “Sunday ho ya Monday; roz khao ande” that used to pop up on television screens during the 90s – which contributed to promotion of egg consumption in a big way in the domestic market.

Role Model

Unlike meat products, which include pork, buffalo and beef, poultry products don’t have much religious or social stigma attached to them. Hence, as the demand for poultry products – especially eggs – started scaling up, more farmers entered into the business of chicken meat and egg production. But the real thrust in egg production came when farmers in Namakkal, a small town in south-west parts of Tamil Nadu marred by a crop failure due to lack of rain, tried their hands at the poultry sector. The business turned out to be more profitable than farming and many of them took up egg production as a permanent source of livelihood. Not much later, the town went on to become the largest egg production location in the country!

Namakkal also started supplying eggs to other parts of the country and the Middle East. An interesting offshoot of this development is that the high demand for Namakkal eggs in different parts of the country also led to the growth of the lorry transport sector in the region. And today, the transport and truck body-making industry in Namakkal is equally famous as an avenue for employment generation on par with the poultry and egg production industry. According to industry estimates, the city has exported roughly over 700 crore eggs in the last 10 years. While diseases remain the biggest threat to the poultry sector, Tamil Nadu Veterinary and Animal Sciences University’s (TANUVAS) Veterinary College and Research Institute has helped the local poultry industry to fight infections and diseases, increase productivity and meet global quality standards.

Namakkal in Tamil Nadu is Indias largest egg producing region
Namakkal in Tamil Nadu is India’s largest egg producing region. It has exported over 700 crore eggs in the last 10 years.

Due to a major concentration of egg producers in Namakkal, Tamil Nadu accounts for the maximum production of eggs in India. In undivided Andhra Pradesh region, Hyderabad is the city with maximum poultry farms and hatcheries. Karnataka, Maharashtra, Gujarat, Madhya Pradesh, Odisha and North Eastern States are some of the other major egg producing regions in the country.

However, the outbreak of bird flu in India in the middle of the last decade made the poultry sector face an import ban by UAE and several other countries in the Middle East. This led to the growth of India’s processed egg industry, which includes liquid and powder eggs that are used extensively in bakeries. This can be validated by the fact that while in FY2008 processed eggs accounted for just 36.1% of India’s total egg exports, by FY2014 the number had surged to over 56%.

However, the growth of processed eggs is limited to a few, or to be precise, the segment is largely dominated by SKM Egg Products. The demand for egg powder can be gauged from the fact that SKM EGG has set up a plant with a capacity to process 1.8 million eggs daily for production of 6,500 tonne of egg powder annually. The company, which is a joint venture between SKM Animal Feeds & Foods and Tamil Nadu Industrial Development Corporation (TIDCO), has registered a steep rise in its revenue from just Rs.106.9 crore in FY2008 to Rs.239.3 crore in FY2014. However, despite a 14.37% CAGR rise in revenue between FY2008 and FY2014, the company had its share of downs and has made a loss on two occasions between FY2011 and FY2014. SKM’s net revenue in FY2015 was Rs.287 crore and it made a profit of Rs.25 crore post-tax. The company’s export during the year was Rs.258.74 crore compared to Rs.216.53 crore in FY2014.

create disease-free egg and chicken export zones
A poultry farm and a hatchery situated in Namakkal (Tamil Nadu). The government should identify pockets in India and create disease-free egg and chicken export zones.

Interestingly, demand for Indian egg products has considerably gone up in the international market following the outbreak of avian influenza in US recently. Due to the restriction imposed by many countries on import of egg products from US during 2015 (even China banned US eggs in January 2015), there has been an increase in demand for eggs from India and the egg prices have also gone up. However, there’s a word of caution. “There could be a downturn in egg prices in FY2017 as some of these importing countries in a bid to curb rising cost of eggs can replace egg products by alternate ingredients and reduce usage of egg powder in the recipe of the final product,” states a report by SKM Eggs.

Though there is a good demand for eggs in the Japanese market, many exporters avoid entering this market due to stringent quality checks. Many industry insiders give credit to SKM Egg for investing heavily in setting up a plant on the Karur-Erode Road, away from Namakkal, and meeting the stringent quality parameters required by egg powder importing countries, especially European Union and Japan.

Fragile They Are

Diseases are a major threat to the sector. It not only puts a financial burden on people associated with the trade but also brings a bad name to the entire export consignment from a country. India is a big country, and a bird flu outbreak in Karnataka has little chance to get transmitted to chickens in Tamil Nadu or Andhra Pradesh. But, due to a lack of awareness, importers generalise the incident and put a blanket ban on all chickens and poultry products exported from India. “There has never ever been a single outbreak of bird flu in Tamil Nadu. But the fear factor is so high that even if there is an outbreak of bird flu in desi or wild birds in some far away state, import from the entire country is restricted,” says Dr. P. V. Senthil, General Secretary, Livestock and Agri Farmers Trade Association (LIFT). He feels the government should make efforts to keep importers informed about the real situation.

Like many other food products, poultry and egg products also need to go through various stringent quality checks to adhere to the food quality guidelines in the domestic market and as per the parameters of the importing country. Hence, there is also a need to expedite certification-related issues with countries that have banned the import of Indian poultry and poultry products. The government also needs to set up a web-based mechanism to address challenges faced by exporters and issuance of various food quality certifications. 

To address the disease issue and to promote export of eggs, the industry has been demanding that the government identify pockets in India and create disease-free egg and chicken export zones.

Egg producers need an average working capital for 45 days, which includes inventory and receivable periods. Suresh Rayudu Chitturi, Managing Director, Srinivasa Hatcheries and Chairman, Confederation of Indian Industry (CII), Andhra Pradesh, feels that there is a dire need for low interest loans for the sector. He is of the view that the poultry sector needs investments in research and development to create new varieties of chickens and egg products to meet stringent food quality parameters in various countries and also to market Indian poultry brands. According to Chitturi, loans provided by Indian banks come with a much higher interest rate compared to those provided by banks in developed economies. He also points to volatility in international currencies contributing to further pressure on the profit margins of exporters from India. “While big corporations can hedge themselves against forex fluctuations, exporters in the poultry sector don’t have the resources to take the advantage of hedging,” adds Chitturi.
Further, the sector has been feeling the pinch of rising inflation in India. While commodity prices have come down in the international markets, it has gone up in India. Rising cost of maize and soya, which are some of the key raw materials used in the poultry sector, has added to the overall production cost. Dumping of egg powder by US and other countries in the European market is also putting pressure on India’s egg exports.

Growth Drivers

The Indian government provides various financial incentives to encourage exporters. Agricultural and Processed Food Products Export Development Authority (APEDA) provides transport assistance, which is payable on the basis of gross weight for both air and sea shipments. Eggs, including Specific Pathogen-Free (SPF) variety, are also eligible for this incentive to all destinations except neighbouring countries. Under the new Foreign Trade Policy, egg exporters get 3% incentive under MEIS and 1% additional incentive under Duty Drawback scheme. This policy support is key to ensuring that a growing number of investors in the micro and small enterprises categories too take the egg bet.

Adding Value

There is big potential for value-added egg products across international markets and given the investment costs in value-added egg products like egg powder, competition is limited in this space (unlike in the whole egg segment). This could be a segment for exporters with big coffers to look at. Coming back to the whole egg segment, while the recent bird flu outbreaks in US did prove to be an opportunity for Indian poultry industry in the short run, industry’s prospects in the long-term too look bright. A recent report by US-based International Food & Agribusiness Management Association (IFAMA) states that, “considering the size of the India’s poultry sector, its price competitiveness and Indian entrepreneurship, India is set to take a more active role in the global poultry trade especially with respect to exports to the Middle East.” And given that egg is consumed all over the world in huge quantities – as it is a cheap source of proteins and minerals – Indian egg producers can use their low-cost production base to their advantage.

A word of caution though: Even with a wonderful year gone by, don’t bet on putting all your eggs in this one basket!

 

“There Is Huge Potential In Powdered Eggs”

Suresh-Rayudu-Chitturi feb 2016
Suresh Rayudu Chitturi MD, SRINIVASA HATCHERIES & CHAIRMAN, CII (ANDHRA PRADESH)

TDB: Poultry business is largely concentrated in Andhra Pradesh, Telangana and Tamil Nadu. Is it because of climatic conditions in the region or is it the business environment in these states that promotes the industry ?

Suresh Rayudu Chitturi (SRC): We can attribute this to the entrepreneurial skills of people in Andhra Pradesh. Initially, the poultry movement started in Hyderabad in the 70s and later people from other regions started investing in the sector. Export of the product started in recent years when a new generation of entrepreneurs started to explore market opportunities overseas. Another factor responsible for growth of the sector in this region is that the per capita consumption of poultry products is much higher in South India as compared to other parts of the country.

When it comes to exports, Indian egg is amongst the lowest priced eggs in the world, and as such, has strong demand in the overseas market. If we take the example of other low-cost egg producers like African countries and Myanmar, their egg prices are almost two-and-a-half times to three times more than that in India. Even in the processed food segment, there is a huge opportunity for Indian exporters. We have an advantage on the pricing front, compared to other major poultry and egg exporters. However, there are some barriers for Indian exporters in terms of quality standards which is not an important factor in the domestic market.

TDB: What other challenges does the Indian poultry and egg industry face?

SRC: High interest rates on loans are a major hindrance for the growth of the sector. While our peers in US or Europe get finance for their businesses at a very low rate of interest, we get loans at an interest rate that averages 6-7%, which is double the interest rates that US and European exporters are being charged. If we compare the Indian interest rates with Japan, they are almost six to seven times. Moreover, the loan itself comes with only a one year moratorium and six years repayment schedule, which is a very short duration if we take into account the fact that the average life of a poultry farm is 25-30 years. If the depreciation period of a farm is so long, the loan repayment period should also increase. In the West, the loan repayment period is around 15 years. The first 18 months go into bringing out the first phase of production, whereas the loan repayment in India starts from the very first year. The moratorium period should be second year onwards and the repayment period should be at least 10 years. The current situation is such that one has to start repaying loans even before production starts. This makes the business unsustainable. If we are able to control these costs, our egg prices will come down by 50-60 paise per egg.

TDB: Don’t we have the option to source funds from international markets where prevailing interest rates are much lower than in India?

SRC: To avail loans from the international market, one needs to have guaranteed export markets. But if one avails such loans, there is a good opportunity. And even then, if we look at foreign currency exchange rates, value of our currency has been eroded by 25-30%. That makes loans more expensive.

TDB: But then you have the option to hedge and arrest fluctuations in foreign currency exchange rate...

SRC: Hedging options are there but it is not something that everybody understands. Considering the complexities attached to the process, it’s only possible for big corporations to opt for hedging.

TDB: Recently there were reports of poultry farmers demanding rebate on soya imports so that raw material and input cost for the sector can be controlled. What’s your take?

SRC: These are temporary measures. We are a net exporter of soya, however, last year, there was an exception. The drought in the soya production regions in Madhya Pradesh, Maharashtra and some other parts hase affected domestic production of the crop. It has led to higher prices for the crop in the domestic market. In fact, India is the only country where soya prices have gone up. Soya prices in other major producing countries like Argentina, Brazil and US, where commodity prices have touched the bottom, have declined. Normally the prices come down by December, but this year, soya prices have risen by 30-40%.

TDB: The Middle East and some parts of Africa consume a majority of eggs shipped from India. Is it because the food quality norms in US and Europe are stringent and act as deterrents to the Indian egg exporting industry?

SRC: Export to Middle East and Africa is largely in-shell eggs because it is a logistical challenge to export shell eggs to the far West. In-shell eggs have a long shelf life of about 10-12 weeks without refrigeration. But for exports, eggs need to be shipped in refrigerated containers. Moreover, the quality standards in the West don’t permit imports of Indian eggs. They are very particular about antibiotics and chemical residue. If one has to serve those markets then new farms need to be set with stringent quality check to adhere to the standard of those markets. However, this is possible. We have seen that the seafood sector in India is already practising this.

When it comes to the powdered egg segment, there are only 3-4 plants which are producing it in India for exports to Japan and EU. There is a huge opportunity in this category but it requires heavy investments to meet quality and production parameters of the export markets. There is a strong demand for powdered eggs in the domestic market. In the 1950s, a housewife used to spend hours in a day to prepare food, but today we are down to minutes. As more housewives in India are venturing out of their homes, there is potential for growth in processed and ready-to-cook food items. This should lead to an increased consumption of powdered and processed eggs in the domestic markets.

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