Avian Influenza and Poultry Trade

Alessandro Nicita

World BankDECRG-Trade

May 2007

The Virus

• Two types of virus, many strains:

– Low Pathogenic Avian Influenza (LPAI). The symptoms are similar to these of Newcastle and other diseases. This virus is generally detected only by testing.

– High Pathogenic Avian Influenza (HPAI). The effect of HPAI on poultry is close to a 100% death rate. The virus appears to be endemic in birds and may also occur as a mutation from Low Pathogenic strains. The most famous strain is H5N1.

It is not clear where H5N1 originated, but clues indicate that the H5N1 virus has circulated continuously in domestic birds in Southeast Asia since 1997 and, as a consequence, has evolved substantially to the present strain.

In other words, domestic birds spread HPAI to wild birds. Wild birds survive much longer due partial immunity owing to previous exposures to LPAI. Also, several wild bird species are found to survive infection and shed the H5N1 virus without apparent disease signs. Thus, wild birds can effectively carry the virus long distances through migration.

The Virus

Source: Olsen et al., Science 312, 384 -388

(2006)

Migratory flyways of wild bird populations

Transmission:

The virus can survive very well outside the host. Especially at low temperatures, it can survive up to 6 weeks in bird droppings.

In practice, evidence suggests that the virus spread from farm to farm by movement of live birds or simply through contact with contaminated materials (shoes, vehicles, cages, feed, or any equipment). It spread internationally through migratory flyways and the trade of live birds or infected materials.

The virus• Prevent: Preventive Measures

– Increase farmer awareness (especially for small rural farmers)

– Continuous surveillance– Appropriate biosecurity

• Control human traffic in poultry farms • Avoid equipment sharing• Quarantine new birds into flock• Avoid open range rearing in waterfowl prevalent

areas– Import restrictions (strict technical regulation)

• Eradication:– Culling (depopulate flock and destroy carcasses)– High pressure spray cleaning and disinfestations– Trade bans

Human Influenza Pandemic Scare

"Spanish influenza" pandemic in 1918,"Asian influenza" pandemic in 1957, and "Hong Kong influenza " pandemic in 1968.

• Because the virus is new, the human immune system has no pre-existing immunity, so people may experience more serious disease than with common influenza.

• Human infections from H5N1 suggest that this strain of the Avian Influenza Virus is a virus with pandemic potential in humans.

• A pandemic occurs when a new influenza virus mutates and starts spreading as easily as normal influenza through sneezing and coughing.

• An influenza pandemic is a rare but recurring event. Three pandemics occurred in the previous century:

Recent H5N1 outbreak - Timeline

• Start – December 2003 in Korea

• Early 2004 – Cambodia, China, Hong Kong, Japan, Thailand, Vietnam

• Mid 2004 – All of South- east Asia

• 2005 – Russia, Turkey• 2006 – Europe, Middle

East, Africa

• North America 2004, but it was low pathogenic

A total of 200 million birds have been culled since the outbreak started.

The Size of the Poultry Industry• The US produces almost 10 billion “Broiler” chickens per

year.• Brazil produces 10 million metric tons (5 billion chickens

per year) Exports about 3 million tons. • Thailand produces about 20 million chickens per week

(or about 1 billion per year).

• World Poultry meat production:– about 60 million metric tons– comparable with the production of beef– about half of that of pork

• Poultry is a rapidly increasing market.• Most production is consumed domestically.• World Trade: 10 billion USD.

Economic Effects of Avian Flu

• DEMAND: Decline due to consumer scare– Short term (consumer confidence)– Long term (consumer behavior)

• SUPPLY: Decline due to culling, import bans– Increase in global poultry prices – Changes in the poultry trade

• Increases in domestic production (Russia, Nigeria)• Trade diversion: shifts to other suppliers (Japan, EU, Middle

East)

Demand: no sustained effects

Supply: Import bansIn Theory:• World Organization for Animal Health (OIE) guidelines:

– Not to take regulatory action on countries where HPAI is found only in migratory or wild birds.

– Bans should be lifted once the area is free from HPAI for 12 months. – Imports bans should not be applied to product that have been rendered non-

infectious (processed to at least 70 degrees celsius).

Some countries apply the OIE guidelines… some others opt for more stringent measures (global bans).

In practice… many countries follow the OIE guidelines– US: as of now there are prohibitions on all live and unprocessed meats from

most of Asia, Africa and some European Countries.– EU: prohibitions on all live and unprocessed meats from most of Asia until at

least December 2007. – Japan applies import bans on most East Asian countries.– Many countries recognize “regionality”, which restricts imports only from affected

regions within countries.– Some countries overreacted, and applied global bans… protectionism?

Shortages in supply led toprice increases

8010

012

014

0

2000 2001 2002 2003 2004 2005year

Live Poultry Eggs

Frozen cuts Preparations of Chicken

What happened to Poultry Trade?

Four Major Products:

• Chilled/Frozen Poultry Meat• Processed Poultry Meat• Chicken Eggs • Live Poultry

Poultry Meat Trade is Increasing

0

2,000

4,000

6,000

8,000

10,000

12,000

Mill

ion

US

$

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

World Trade in Poultry

Frozen Poultry Processed Poultry Chicken Eggs Live Poultry

Consumption is increasing, trade is increasing

…and world trade composition is changing

2002

Frozen Poultry Processed Poultry Chicken Eggs Live Poultry

2005

Frozen Poultry Processed Poultry Chicken Eggs Live Poultry

Consumption is changing as wellProcessed poultry = Convenience food (Major markets are High Income Countries

Unprepared Poultry - Exporters• Brazil fills increases in demand, replaces AI affected countries• Other countries’ exports have declined (except for EU)

0

1000

2000

3000

4000

5000

6000

7000

8000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Mil

lio

n U

S$

Brazil USA European Union China Thailand Others Avian Flu Others

Unprepared poultry - Major players

20022005

Exporters: Brazil, US, Thailand, China, EU

Importers: Japan, Russia, Saudi Arabia, Mexico, EU.

Brazil gains in Japanese Markets…

• Japan’s total imports have changed little– Pre-AI 2002 (imports =

960 million US$)– Post-AI 2005 (imports =

925 million US$)

• Thailand’s and China’s exports are replaced by Brazil

2002

Brazil

China

Thailand

USA

EuropeanUn.Others

2005 Brazil

China

Thailand

USA

EuropeanUn.

Others

…Brazil gains also in many other markets

• Saudi Arabia– Imports have doubled2002 (330 million US$)2005 (650 million US$)

– China wiped out– Brazil Gains in values

and market share. – EU retains values…

but loses in market share

2005

Brazil USA European Un. China Thailand Others

2002

Brazil USA European Un. China Thailand Others

…Hong Kong Market

2005

Brazil USA European Un. China Thailand Others

2002

Brazil USA European Un. China Thailand Others

• Brazil does not take all, China also gains market share at the expense of the United States and Thailand

• LPAI outbreak in the US caused 3 months of import ban (overreaction?)• China’s price advantage and low transport costs

Question: Is this shift permanent or will the US be able to regain market share against Brazilian suppliers?

…Brazil has zero or little gains when there are

few Thai and Chinese suppliers or there are trade policies in effect

• Russian Market (stable at 800 mil)– regulated by quotas

• Mexican Market (doubled from 250 to 530 mil)– US dominated as external tariffs are prohibitive (200%)

2002

Brazil USA European Un. China Thailand Others

2005

Brazil USA European Un. China Thailand Others

Summary: Unprepared Poultry

• Brazil Main Beneficiary:– Due to high supply capacity… and to low production costs

• Filled the vacuum left by suppliers in AI affected countries • Brazil fills the increase in world demand • Policy intervention appears to be the only force that can limit Brazil’s

expansion.

• Thailand Main Loser: – Exports fell from half billion US$ in 2002 to zero in 2005.

• China Mixed Results: – Loses Japan and Saudi Arabia but gains in Hong Kong (due to

regional bans and lower costs) – Large domestic market softens the losses

• US limited damage (LPAI):– Loses market share in the Asian Market due to early scare– Lock in the Mexico/Russian market because of trade policy and

“regionality”

Prepared Poultry Meat

0

500

1000

1500

2000

2500

Mil

lio

n U

S$

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Others

China

Thailand

USA

Brazil

• Not affected by Import Bans • More rapid growth than unprepared poultry • 2005 increase in growth probably due to Avian Flu

Thailand main loser from Avian Influenza? …maybe not

• Thailand poultry export composition:

0

100

200

300

400

500

600

700

800

900

Mil

lio

n U

S$

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Unprepared Prepared

Exports of Processed Poultry Two main import markets: Processed poultry is convenience food –

major markets are consumers in high income countries)• Japan

– From 240 million US$ in 2002 to 475 million in 2005

• European Union– From 145 Million US$ in 2002 to 250 million in 2005.

– K

2002

Thailand China Brazil USA Others

2005

Thailand China Brazil USA Others

2005

Thailand China Brazil USA Others

2002

Thailand China Brazil USA Others

…indirect policy response to HPAI

• Japan seems happy with shifts in import patterns…– Lower Tariff of prepared poultry from Thailand from 6% to 3% in 5 years

• European Union is not happy…– New TRQ on Poultry Products

On unprepared salted poultry 264,000 tons at a bound rate of 15.4% ad valorem and an out-of-quota rate of 1,300€/ton.

• Brazil 170,000 tons.• Thailand: much of the rest of the quota (but at the moment cannot use it!)

On prepared chicken meat TRQ 230,000 tons at a bound tariff of 10.9% ad valorem. The out-of-quota rate will be 1,024€/ton.

• Thailand 150,000 tons.• Brazil 73,000 tons.

Live Birds and Chicken Eggs

• Smaller Markets with no or little export growth and most trade occurring between neighboring countries. Why?– Higher transport costs– Local variety and freshness more important

• Limited Impact of HPA – Effect limited to lower trade between China - Hong

Kong and Malaysia - Singapore. – No change in market shares, or replacement of

suppliers.

From the Importer perspective

• In most countries consumption has not been affected much, loss of suppliers of unprepared meat is compensated by:

• Shifts in suppliers– To the advantage of suppliers in AI free countries

• and shifts in product– To the advantage of suppliers of processed poultry meat

• processed abroad instead that domestically• price differential from unprocessed is smaller (as a consequence of

the increase in unprocessed poultry price).

Japan’s Imports

Who has lost from AI so far?• Thailand? China? US?• Russia? Japan? EU? Mexico?

• Big Producers? Not generally so.– most have benefited from higher prices – Thai industry reacted– Domestic production increased

• Small Producers? Depends.– High biosecurity costs

• Consumers? Probably so.– Avian Influenza led to trade restrictions and… more restrictive

trade generally raises prices and hurts consumers.

SADIA BRAZIL

CPF Thailand

Summary

• Before AI: We had two very fast growing competitive exporters of poultry products – Brazil and Thailand

• AI related import bans skewed the equilibrium in favor of Brazil. – Most restructuring happened in Asia– Brazil stole market share from Thailand – Thai firms had to refocus their output

Open questions

• Temporary effect versus permanent effect• Overall Effect of AI on Thai Firms

– After all, it may be positive, as firms have upgraded along the production chain.

• Effect of AI on Brazilian Trade– Has AI skewed Brazilian exports in favor of frozen poultry? Or is

Brazil also focusing on processed poultry? just in case…• Possible Dumping

– In Africa or other Low income countries?• Investigate Trade Policy

– AI Scare: Imposition of bans as protectionist measures– EU response to surge in imports from Thailand

• Effect on other markets – Beef, pork

• Welfare Effects (employment)