The pain inside poultry’s new pecking order

Those are the words of Manideep Soni, a 30-year-old poultry farmer from Kudani village, about an hour’s ride from Kanpur city in Uttar Pradesh. As a child, Soni had seen his father managing a small broiler farm, raising chickens for meat. That was once a profitable business—even a decade back, the family earned more than ₹1.5 lakh a year from the 3,500-bird farm. But for the past few years, it has been a recipe for disaster.

Even before the lockdown was announced in 2020, the industry was devastated by rumours that poultry birds are infected with coronavirus. Soni had to bury the birds alive. To repay bank loans, he sold the only plot of farm land he owned. The next year, he had to battle an episode of bird flu. 2022 was yet another year of grief as feed prices—led by a global surge in prices of grains and oilseeds—shot through the roof. Demand for poultry meat has recovered post-pandemic, but for more than four months now, Soni’s cost of production is higher than market prices. And the possibility of another viral outbreak is looming on the horizon. North and South America, Europe and parts of Asia and Africa have reported an avian flu.

The result? Soni’s farm is bare; the bright orange feeders are gathering dust; cobwebs have taken over the protective nets. He is a now a defaulter with ₹4 lakh in bank loans after selling two flocks at less than growing costs. To place a new flock of chicks, which can be ready in 40 days, Soni needs ₹5 lakh in working capital. But he does not have a penny to spare.

The recurrent shocks to the broiler meat industry—from demand destruction during the pandemic to regular crackdown on petty retail traders by local administration in different states—has pushed the market towards consolidation.

As most farmers have little or no working capital left, they are getting into contract farming or what is known as the ‘integration model’. All big names in the industry—Venky’s, Suguna Foods, IB Group, Skylark and Shalimar, among others—are pushing forth with the model.

It works like this: large companies provide farmers with chicks, feed and medicine. Farmers raise chickens in their own shed bearing labour and energy expenses. They receive between ₹6-7 per kg of live bird towards raising costs. Contract farming takes care of wild price swings, but if mortality shoots up, say due to a cold wave or a disease outbreak, farmers receive less than the contracted price. Ditto if the feed conversion ratio—a measure of how much feed is consumed by a bird to gain a kilogram in weight—turns out to be inefficient.

The poultry industry is divided into two segments: broilers, where chickens are raised for meat, and layer farms which produce eggs. The industry estimates the poultry market at around ₹1.5 trillion, of which two-third comprise of broiler meat, while layer farms account for the rest. Currently, about 70% of all broiler meat production in India is under contract farming.

The trend of consolidation follows the same path followed by developed markets like the US. But with one major difference. In India, contract farming companies mostly offload their produce in the wholesale market, competing with individual farmers. This is because the market for processed meat is limited, estimated by companies at just 4-5% of total volumes they handle.

The companies which engage in contract farming are cost efficient since they produce their own chicks in hatcheries and have in-house feed plants. So, they often underprice individual farmers out of the market. The cutthroat competition bleeds both contract farmers who are given stringent targets and individual growers who must buy all inputs from the market at steep prices.

“So, if I am willing to sell at ₹80 per kg (compared to the production cost of ₹95-100 per kg), the companies offer a lower price to the wholesale trader, say ₹75 per kg. This leaves me with no choice but to sell at an even lower price. How will I compete with large players whose input costs are lower?" asks Manideep Soni.

Timing is crucial in the business. A farmer cannot hold on to a ready flock since bigger birds also eat voraciously. This often means distress sales at less than market rates.

Wild Swings

Price fluctuations in wholesale markets add to the farmers’ risk. For instance, live broiler prices in Uttar Pradesh, varied between a high of ₹124 per kg in March to a low of ₹80/kg in November last year (compared to production costs of ₹90-95 per kg). In 2020, just before the lockdown was announced, prices plunged to less than ₹20 a kg in March and rose sharply to ₹93 per kg in December.

Prices fluctuate due to a variety of reasons. Demand for both meat and eggs usually slide during the summer months. In north India, demand takes a hit during religious periods (such as Navratri, Sawan and Shraddh). The ritualistic abstinence of meat by a section of the population is often accompanied by forced closure of retail shops and ban on push cart vendors by vigilante groups, scuttling demand.

The other common problem is the risk to retail trade. As per rules set by the Food Safety and Standards Authority of India, all animals must be slaughtered at a licensed facility and only the dressed meat can be sold at stores. But unlike goat meat or mutton, consumers prefer to purchase live chickens and have them skinned at retail stores. The FSSAI rules are frequently used by municipal administrators in different states to crack down on petty retailers. The price hit following such moves, which reduce demand artificially, is borne by hapless farmers.

“There are no slaughter houses nearby, so even licensed retailers cannot operate legally. Retail trade was once a thriving business but is now at the mercy of local law enforcement agencies," says a wholesale poultry meat trader from Unnao, who did not want to be named. The trader also reported a 25% drop in volumes compared to pre-pandemic sales.

“Instead of promoting consumption of chicken, which is one of the cheapest sources of protein, authorities are more interested in choking the trade. Besides, there are no pan-India estimates of seasonally varying demand which often leads to over production and collapse in prices," he adds.

While these risks pushed most farmers towards contract farming, the consolidation has not worked in favour of farmers.

Unfair practices?

Santosh Kumar from Korarikalan village in Unnao moved into contract farming last year after incurring ₹7 lakh in losses in 2020. But he has barely been able to make any money out of it.

Kumar is paid ₹6.75 per kg towards growing costs, but if his total cost of production goes up by ₹4 per kg, the company deducts ₹2 per kg from growing costs. Production costs can go up due to inclement weather like a heat wave or a cold wave—leading to higher energy costs of heating or cooling—and any spike in mortality. From the last flock of 5,000 birds, Kumar earned just ₹34,000, barely enough to cover energy and labour costs of running the farm for two months.

“If chicks or feed supplied by the company are of poor quality, the final bird weight is lower, which results in deduction of payment to farmers. The contracting company takes blank cheques from us (as a guarantee against theft of inputs or non-delivery of ready birds) but does not share a copy of the contract with us. But what option do I have? No bank will lend to me and I have already invested close to ₹15 lakh to set up this farm," Kumar says.

The current model is riddled with unfair practices, says F.M. Sheikh, president of the Kanpur-based Poultry Farmers and Broilers Welfare Federation. “By not expanding their market for processed meat and dumping the produce in wholesale markets, contracting companies have decimated private poultry farming. These companies have a cost advantage but their practices often crash market prices. So, farmers are burdened by debts they cannot repay; banks label them willful defaulters and in extreme cases, farmers are pushed to commit suicide," Sheikh says.

A 2021 study by the Guru Angad Dev Veterinary and Animal Sciences University in Ludhiana, Punjab, highlighted the pain points of contract farming.

Contract farmers seldom benefit from one-sided policies favouring companies and high-handed practices like getting blank cheques signed illegally, the study stated. “Various types of penalties are imposed on farmers siphoning off their profits, and many a times they are unable to cover their cost of labour and other aspects related to production."

It added that these companies, in a bid to monopolize the broiler industry, dump their produce in the market forcing independent farms to exit. “There is a need to look critically… if these companies have invested in infrastructure development, processing and value addition."

A field survey of contract growers, who were a part of the study, showed that net returns to farmers were (-)4.8% for small sized farms (less than 10,000 birds) and (-)2.7% for large ones (over 20,000 birds).

To address these concerns, in December 2022, the fisheries and animal husbandry ministry released a new set of ‘Contract Guidelines for Broiler Production’ to ensure fair trade practices and a level playing field between small farmers and large companies. It remains to be seen if states enforce the new system and whether farmers receive profitable growing charges.

Pricing power

We are aligned with most of the changes proposed in the new guidelines. It will bring more transparency without changing the working model," says B. Soundararajan, chairman at the Coimbatore-based Suguna group, which works with over 50,000 contract farmers across India.

But is contract farming profitable for farmers? “Our farmers receive between 20-25% return on their investment but one must understand that poultry is not a standalone business. It is one of the several agricultural activities undertaken by a farmer," Soundararajan explains.

“The current crisis in poultry is due to the focus on volumes which impacts the profitability of both companies and individual farmers. But the industry will transform as processed brands gain ground with changing consumer preference. That will give us the pricing power," he adds.

The lack of pricing power is palpable. While the organized dairy industry was able to pass on soaring input costs by hiking consumer prices several times over the past year, the poultry industry fumbled.

Mint reached out to Prasanna Pedgaonkar, general manager at Venky’s, one of the largest players in the poultry industry, but did not receive a response.

“Dairy players have exhibited an ability to pass on input cost hikes to consumers to a large extent, though with a lag. The essential nature of milk, as a food product, leads to a steady demand. Moreover, fresh milk can be processed to make long shelf-life products like skimmed milk powder, butter, and ghee, which have a buoyant demand," says Sheetal Sharad, vice president and sector head at Icra Ltd, a rating firm.

Sharad adds that the poultry industry remains vulnerable to volatility in prices of key feed inputs like soyabean and maize. “Even though demand has revived post pandemic, profitability will remain vulnerable to feed cost and other factors like mortality rates and feed-conversion ratio."

Like broilers, the layer segment of the industry which produces eggs, faces the same headwinds of price swings and disease risks. But losses can be staggering as it requires large capital investments to set up a layer farm—about ₹1 crore in just fixed costs for a 10,000-bird unit.

“In 2022-23, we sold eggs at a loss in eight out of 10 months (till January). As wholesale rates are going to fall further with the onset of summer, I am planning to liquidate a part of the bird stock," says Manoj Juneja, a Kanpur based trader who also runs a layer farm with a daily production of 300,000 eggs.

“These days, I often receive calls from farmers who are keen to exit the business."