Avian Influenza and Poultry Trade

1. Avian Influenza and Poultry Trade Alessandro Nicita World Bank DECRG-Trade May 2007

2. 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.

3. The Virus • 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. Migratory flyways of wild bird populations Source: Olsen et al., Science 312, 384 -388 (2006)

4. 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

5. Human Influenza Pandemic Scare • 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: "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.

6. 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.

7. 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.

8. 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)

9. Demand: no sustained effects

10. Supply: Import bans In 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?

11. Shortages in supply led toprice increases

12. What happened to Poultry Trade? Four Major Products: • Chilled/Frozen Poultry Meat • Processed Poultry Meat • Chicken Eggs • Live Poultry

13. Poultry Meat Trade is Increasing Consumption is increasing, trade is increasing

14. …and world trade composition is changing Consumption is changing as well Processed poultry = Convenience food (Major markets are High Income Countries

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

16. 2002 2005 Unprepared poultry - Major players Importers: Japan, Russia, Saudi Arabia, Mexico, EU. Exporters: Brazil, US, Thailand, China, EU

17. 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

18. …Brazil gains also in many other markets • Saudi Arabia • Imports have doubled 2002 (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

19. …Hong Kong Market • 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?

20. …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%)

21. 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”

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

23. Thailand main loser from Avian Influenza? …maybe not • Thailand poultry export composition:

24. 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

25. …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.

26. 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.

27. 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).

28. Japan’s Imports

29. 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

30. 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

31. 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)