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The Poultry Industry and Its Supply Chain in Malaysia: Challenges from the Covid-19 Emergency

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  • Center for Market Education
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THE POULTRY INDUSTRY AND ITS SUPPLY CHAIN IN MALAYSIA:
CHALLENGES FROM THE COVID-19 EMERGENCY
by Dr Carmelo Ferlito
1
1
Carmelo Ferlito is Director of Petersime Southeast Asia in Petaling Jaya, Malaysia. He is also the Director of the
Center for Market Education and a Senior Fellow at the Institute for Democracy and Economic Affairs in Kuala
Lumpur. He is a Research Advisor for Provalindo Nusa in Jakar
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INTRODUCTION: Covid-19 in the World, in Southeast Asia and in Malaysia
Some reference numbers
Since December 2019, the entire world is facing a new enemy which became famous under
the name of Covid-19, or coronavirus, which is the short version for Coronavirus disease 2019:
an infectious disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-
2). It is the evolution of a well-known type of influenza, for which however a vaccine is yet to
be found. In order to understand the proportions of the phenomenon, a comparison with the
“traditional” seasonal flu would not be useless.
There are four type of seasonal influenza (A, B, C and D); we have vaccines for these common
strands. As a reference, let us keep into account that for the 2018-2019 seasonal flu almost
170 million vaccine shots were distributed in the USA alone
2
. Although the mass usage of
vaccines, the Centers for Disease Control and Prevention (CDC) estimated that since 2010
between 9 and 45 million Americans got infected every year, while the death pick was reached
in 2018 (61,000).
Looking at the whole world, the World Health Organization (WHO) estimated that 3 to 5
million cases of normal flu (the one for which we know the vaccine) every year can be
considered severe, while 300,000 to 650,000 people die of it
3
. Without the flu shots, it is
estimated that cases could be almost double than what they actually are.
As per today (22 April 2020), Covid-19, for which we do not know any vaccine, has infected
for what we know via testing around 2.5 million people worldwide and killed around
177,641. With 45,340 deaths, the USA counts 25.52% of the total Covid-19 victims, while
58.96% of the victims are in Western Europe. The whole Southeast Asia, including Hong Kong,
has “only” 1213 deaths (0.69%), while the Malaysian victims are 0.05% of the total.
Malaysia is scoring very well in terms of recoveries, where 61.09% of the affected people are
now considered recovered, against a world average of 27% (in Singapore, Indonesia and
Philippines the recovery rate is between 9 and 12%).
The tables below help putting Malaysia and Southeast Covid-19 size within the worldwide
context. In fact, numbers are never big or small in absolute terms, but only in relative terms.
2
Official data from the Centers for Disease Control and Prevention (CDC):
https://www.cdc.gov/flu/prevent/vaccine-supply-historical.htm.
3
Official WHO data: https://www.who.int/en/news-room/fact-sheets/detail/influenza-(seasonal).
3
Table 1: Cases, recoveries and deaths in the world and in Southeast Asia (22 April 2020).
Source: My re-elaborations on data from https://www.worldometers.info/coronavirus/.
Table 2: Relative size of Covid-19 in Southeast Asia when compared to the world (22 April 2020).
Source: My re-elaborations on data from https://www.worldometers.info/coronavirus/.
As per 22 April 2020, Malaysia numbers stand as per the following:
- Total cases = 5482 (0.21% of the world total).
- Total deaths: 92 (0.05% of the world total).
- Total recoveries: 3349 (0.49% of the world total).
- Average number of daily cases: 62.30.
- Average number of daily deaths: 2.56.
- Average number of daily recoveries: 42.94.
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1. Terminology and industry structure
We begin these papers by introducing key terms that will be widely used in the rest of the
paper.
Parent stock or breeders are chicken breeding to produce fertilized eggs; according to the
genetic of the breeders, such eggs, once hatched, can give commercial broilers, layers, or
other breeders.
(Commercial) broilers are chicken raised to become poultry meat. Male and females are
usually grown together, as they are slaughtered before reaching sexual maturity.
(Commercial) layers are chicken hens (females) raised to produce table eggs.
Breeders are chickens raised to produce fertilized eggs.
The following infographic helps us to understand the poultry production in Malaysia before
we analyse each step in details.
Figure 1: The poultry production process at a glance.
Source: I3investor.com (2017).
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Figure 2: Broilers: from pedigree to the consumer.
Source: McCay (2008) and Ferlito and Respatiadi (2019).
Figure 3: Layers: from pedigree to the consumer.
Source: McCay (2008) and Ferlito and Respatiadi (2019).
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Figure 4: Broiler operations.
Source: Slides from Mr Jason Cormick, International Incubation Specialist at Petersime nv.
Figure 5: Layer operations.
Source: Slides from Mr Jason Cormick, International Incubation Specialist at Petersime nv.
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2. The poultry industry in Malaysia: an overview
4
As per 2019, the ex-farm value of the livestock products in Malaysia was more than RM 24
billion. Poultry meat contribute with RM 12.4 billion, while the ex-farm value of eggs was RM
5.8 billion; the poultry industry, thus, represents almost 76% of the livestock ex-farm value.
However, the ex-farm value has not to be confused with the contribution to the GDP; as per
2019, agriculture contribution to the Malaysia GDP was 103.8 billion (7.3%) and livestock
represented 14.9% of the agriculture contribution to the GDP (DOSM, 2019).
Figure 6: Ex-farm value of livestock products (RM Million), 2000-2019.
Source: FLFAM (2019).
The yearly chicken per capita consumption is close to 50 kg (third in the world and first in
Asia), while egg per capita consumption is close to 20 kg per year.
The Malaysian poultry industry is self-sufficient, able to produce 98.4% of the national
demand for poultry meat and 113.8% of the demand for chicken and duck eggs. The main
importer of Malaysian poultry products is Singapore (37% of the poultry import and 73% of
the egg import in Singapore come from Malaysia; Goh, 2019. As reference, Singaporeans
consume 34 kg of chicken per capita per year).
Between 2006 and 2019, per capita poultry consumption increased 40%, from 35 to 49 kg per
year per capita, and it is estimated to surpass 50 kg in 2025. Poultry is the main source of
protein for Malaysians; according to statista.com, the consumption of beef and veil is
estimated to be 5.42 kg/year/person, pork 5.31 kg and sheep 1.18 kg. The only match for
4
For an analysis of the criticalities in poultry in Malaysia, see Abdurofi et al. (2017).
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poultry is coming from fish and seafood, with Malaysian consuming around 55 kg per year per
person (Friend, 2015).
Figure 7: Poultry consumption per capita in Malaysia from 2006 to 2019, with a forecast for 2025 (in
kilograms).
Poultry production is divided in Malaysia as per the Figure 8.
Figure 8: Farm distribution in Malaysia (2016).
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Source: DVS Malaysia and FLFAM (2017, 2019).
The low concentration of farming activities in Selangor is not surprising. In 2016, the GDP
composition of the state was as per the following figure.
Figure 9: Selangor GDP by industry in 2016 (RM million).
Economic Activity
GDP
% of the total
Agriculture
3,526
1.40%
Mining and Quarrying
660
0.26%
Manufacturing
73,504
29.21%
Construction
14,527
5.78%
Services
151,278
60.13%
Import duties
8,105
3.22%
Total
251,600
100%
Source:
https://www.dosm.gov.my/v1/uploads/files/1_Articles_By_Themes/National%20Accounts/GDPbyState/Table
%20Publication%20GDP%202010-2016.pdf#page=27.
In Selangor, then, only 1.4% of the GDP is due to agricultural activities, while the great
majority of Selangor economy is driven by services and manufacturing. This is the result of a
mix of planning and spontaneous order that brought the state to be what it is now and
presenting these features. Population density and a clear economic direction would make a
disaster the attempt to change those features, while, as we shall see at the end, it would be
make more sense to incentivize the presence of those industries in the poultry value chain
which do not produce chicken directly but are essential for that production. As shown below,
most of the MNCs in poultry related equipment are now located in Selangor and attentions
should be paid to them.
In 2017, there were 4 grandparent stock farms supplying 100 percent of the parent stock
chicks needed by the parent stock (PS) farms. There were 20 PS farm companies in the
peninsular part of the country. These farms produced more than 807.52 million broiler day-
old-chicks in 2017. Cobbs and Ross were the predominant breeds, together accounting for 92
percent of the total.
Also in 2017, there were approximately 2,606 broiler growing farms, producing 767 million
birds in the same year. About 52.71 million live birds and 15.01 thousand tons of chicken meat
and further processed products were exported, mostly to Singapore, where Leong Hup, the
biggest Malaysian player, has three large processing plants (Ramanee, 2020a).
The top poultry producers in Malaysia are the following ones:
Figure 10: Top poultry producers in Malaysia.
Company
Head slaughtered annually
(million)
Layers (million)
Leong Hup Holdings Bhd
99.1
4.5
QSR Brands
50
FFM
39
0.8
Hy-Fresh
29.20
Sum Soon
28
Chop Cheong Bee
24
10
Ayamas Integrated
23
Lay Hong
20
3.05
Malayan Flour Mills
20
Farm’s Best
19.5
Farm’s Best Food Industries
18
Vista Jiwa
15
DBE Gurney Resources
12
Gesing Group
8.4
QL Resources
7
7.40
CCK Consolidated
6.5
Aqina Group
2.5
TD Poultry
2
Teh Yeow
0.5
FFM Farms
N/A
0.9
Huat Lai Resources
N/A
1.2
CP Malaysia
N/A
CAB Cakaran
N/A
LTKM
N/A
2.4
Source: WattAGnet (2019).
Consider that the top 8 integrators, active at all levels of the supply chain, control up to 65%
of the market.
With 99.1 million broilers slaughtered annually, Leong Hup is number 26 in the list of the top
broiler producers in Asia. Malaysia, instead, scores better in the egg production, with Leong
Hup, Lay Hong and LTKM being the 7th, 8th and 9th producer of eggs in the continent
(WattAGnet, 2019).
Among the poultry producers, there are five poultry farmers listed on Bursa Malaysia with a
market capitalisation of more than RM 300 million; they are: CCK Consolidated Holdings Bhd,
Teo Seng Capital Bhd, Lay Hong Bhd, Leong Hup International Bhd and CAB Cakaran Corp Bhd
(Lee, 2019).
In 2018, the weekly ex-farm DOC price fluctuated between USD 0.33 and USD 0.57/chick. For
broilers, this fluctuated between USD 0.88 and USD 1.30/kg live weight. The cost of broiler
production ranged from USD 1.23 to 1.31/kg. A total of 68.8 million birds were exported, with
a 30.5% increase over the previous year.
The latest available prices refer to February 2020 and they are:
- Broiler: USD 1.17/kg
- Cost of production: USD 1.05/kg.
- DOC: USD 0.37/bird.
- Grower feed: USD 423/tonne.
The poultry industry is the most successful Malaysian livestock segment and has the highest
output value, with daily production averaging around 2 million birds (Asian Poultry Magazine,
2020).
Figure 10, instead, shows us the evolution of the chicken population in Malaysia, with specific
reference to the parent stocks.
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Figure 11: Livestock standing population in peninsular Malaysia (2009-2019).
Source: DVS Malaysia and FLFAM (2017, 2019).
Due to market evolution, the number of farming companies is gradually getting smaller but
getting bigger in production capacity. There have also been a few mergers and acquisitions
among the parent stock farms as part of the ongoing restructuring of the broiler production
system. Most new farms are built as environmentally controlled closed poultry houses with
various degrees of automation.
In 2018, 812 million day-old-chick (DOC) were produced (among them, 771 million broilers).
21 broiler PS companies were in operation, with annual DOC production ranging from 5.3 to
145.5 million birds.
In 2019, the yearly production of broilers was close to 850 million birds (+93% on 2005) (out
of a total of 888 million DOC), while the yearly output of eggs reached 10.3 billion (+39.66%
on 2005) (the title in the table below is wrong, it is meant to be the yearly output).
12
Figure 12: Yearly outputs of broilers, chicken eggs and meat duck in peninsular Malaysia (2005-2019).
Source: DVS Malaysia and FLFAM (2017, 2019).
About 30 percent of broilers are channelled through modern processing plants and are sold
in supermarkets and fast-food outlets while the remainder is still sold as live or dressed birds
in wet markets. There are tentative steps being taken by the government to stop chicken
slaughter in live bird markets for hygiene and environmental reasons (Asian Poultry Magazine,
2020).
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3. Beyond farming: automation, processing and supply chain
When we look at farming, we have to consider that livestock production is a sophisticated
industry, which involves several degrees of automation. The Malaysian production of 840
million chicken per year and 10 billion eggs per year is conducted at industrial level. This
means that livestock production is much more than land, birds, feed and water. In this section,
we will take a look at the machineries used in poultry farming and at the different steps in the
linked supply chain
Figure 13: A broiler shed.
Source: www.choretime.com.
A broiler farm usually consists of several broiler sheds, each accommodating 20 to 25,000
birds. As it can be seen in the drawing, a broiler shed uses automated equipment for: feeding
lines, drinking lines, ventilation, heating, feed storage and feed distribution, lights, control
system.
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Figure 14: A breeder shed.
Source: www.choretime.com.
Similarly, a breeder farm consists of several breeder sheds, each of one usually
accommodating 8-9000 females and 1000-1500 males. As it can be seen in the drawing, a
breeder shed uses automated equipment for: feeding lines (males and females), drinking
lines, lights, nesting, egg collection, ventilation, heating, feed storage and feed distribution,
control system.
Figure 15: A layer shed.
15
Source: www.choretime.com.
Laying hens are usually raised in cages. Each farm consists of multiple sheds, and each shed
usually accommodate between 20,000 and 60,000 birds. The automated equipment are:
cages, feeding lines, drinking lines, egg collection, lights, manure transport, feed storage and
distribution, control system, ventilation and heating.
If raising birds is the central part of the production chain, before chicken coming to life their
eggs need to be incubated and then hatched. At the end of the chain, instead, we find
slaughtering and processing.
A modern hatchery looks like in the drawings below:
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Figure 16: An automated hatchery.
Source: Petersime database.
The typical modern hatchery today is designed to produce between 300,000 and 12,000,000
DOCs per week, while each machine can accommodate between 20,000 and 150,000 eggs.
The incubation and hatching process takes 21 days.
Most of the equipment for the different stages of the production chain are imported from the
Western world and it is not by chance that most of the world leading equipment producers
established their regional head quarter in Malaysia.
It is the case, in example, of Big Dutchman, a German company and world leading producer
of equipment for broiler, breeder and layer farms. Big Dutchman regional office is located in
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Setia Alam, Selangor, and it has a yearly turnover of RM 700 million (RM 200 million in
Malaysia); it has to be noted, for a clearer picture, that BD purchases parts for RM 28.8 million
from Malaysian suppliers, and it locally employs around 300 people.
BD in Malaysia has around 60 customers and controls 70% of the market share for layer
farming equipment and 30-40% of market share for broiler and breeder equipment. These
figures help us estimating the turnover of poultry equipment in Malaysia.
Similarly, the world leading producer of incubators and hatchery equipment, Petersime from
Belgium, has established its regional office in Ara Damansara; it is a service office, focused on
spare parts, helpdesk, training and repairs, employing around 10 people. Petersime turnover
in Malaysia is fluctuating between 2 and 5 million euro per year, while the company controls
70% of the local market share. It has 24 active accounts and a total 948 installed machines;
the local office has a turnover of around RM 10 million in spare parts, 26% of which is sold
within Malaysia.
To further understand the complexity in the poultry value chain, let us consider that Chore-
Time, one of the leading equipment producers (including all the sets of automation for broiler,
breeder and layer farms), has a spare part list of 32,000 SKUs, while Petersime, the leading
incubator producers, supply around 3,500 SKUs as spare parts (1,000 of which are kept in
stock in the Malaysian warehouse).
Beyond Big Dutchman and Petersime, several other key producers of farming equipment have
established Malaysian operations at different levels. Moreover, several animal health MNCs
have their regional office in Malaysia. The table below presents a summary.
Figure 17: International equipment and animal health suppliers with registered presence in Malaysia.
Company
Country of
Origin
Type of equipment
Malaysian
office
Level of presence
Big Dutchman
Germany
Complete set for raising broiler,
breeder and layer.
Setia Alam
Production, assembly,
logistics, sales and
service.
AGCO GSI
USA
Complete set for raising broiler,
breeder and layer.
Pulau Pinang
Logistics, production,
sales and service.
Roxell
Belgium
Feeding and drinking lines.
Klang
Assembly, logistics,
sales.
Petersime
Belgium
Incubators and hatcheries
Petaling Jaya
Logistics, service,
training.
Moba
Netherland
Egg handling.
Petaling Jaya
Logistics, service,
sales.
C-Lines
France
Prefabricated sheds.
Kuala Lumpur
Sales.
Pericoli
Italy
Ventilation.
Shah Alam
Production, logistics,
sales and service.
Sanovo
Denmark
Egg handling.
Petaling Jaya
Sales.
Vencomatic
Netherland
Breeder equipment.
Puchong
Sales.
Giordano
Italy
Plastic boxes and slat.
Pulau Pinang
Production and sales.
Boehringer-
Ingelheim
Germany
Animal health.
Petaling Jaya
Maintenance,
forecasting,
purchasing, training,
logistics.
Zoetis
USA
Animal health.
Kuala Lumpur
NA
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MSD
Netherland
Animal health.
Petaling Jaya
NA
Ceva
France
Animal health.
Kuala Lumpur
NA
Hipra
Spain
Animal health.
Kuala Lumpur
NA
Elanco
USA
Animal health.
Petaling Jaya
NA
Finally, it has to be noted that the average cost of setting up a broiler farm with one shed is
estimated to be close to RM 1,000,000.
Given the considerations above, we can try to estimate the harms caused to poultry
production by disruptions in some leading equipment suppliers.
Case 1: Petersime.
We have seen that in 2019 in Malaysia around 850 million chicken were produced. Having
Petersime 70% of the market share in Malaysia, this means that around 595 million chicken
are born from Petersime incubators in a year, which is 11.9 million per week.
Considering that a single hatchery can produce, usually, between 500,000 and 2 million
chicks per week, if a damage would occur in hatchery using Petersime machines (i.e. Leongh
Hup, Huat Lai…), the inability for the local office to provide the necessary spare parts or
technical intervention, would result in a drop of the chicken weekly production in Malaysia
between 4.2% and 16.8%.
The more the MCO is extended, the higher the risk for a hatchery to require a technical
intervention and to be unable to receive the necessary technical assistance. The
impossibility to intervene in a single hatchery can bring a drop in the monthly chicken
production up to 8 million birds.
Case 2: Big Dutchman.
We have seen that in 2019 in Malaysia around 10 billion eggs were produced. 70% (7 billion)
were produced in layer farms using Big Dutchman equipment.
A small/medium layer farm, with only one shed, accommodates 50,000 hens and each hen
produces 3-4 eggs per week. Thus, the weekly production of such farm is 150,000-200,000
eggs.
This means that the disruption in operations of a single small layer farm can cost up to
800,000 eggs in a month.
In conclusion, producing chicken implies much more than birds, feed, water and land. The
supply chain is much more complex. Also looking simply at machines as a whole is misleading;
in fact, if it is true that a chicken farm needs an automated feeding line, a true understanding
of the complexity arises if we look at all the components of that line, including the motor, the
metal auger that carries the feed and all the little screws that keep the pipes together. The
same can be said for feed bins, or for a water line, made of steel and plastic.
The reasoning can be extended to the final passages of the chain; chicken needs plastic
containers to be carried to supermarkets, and supermarkets in turn need fridges to keep
chicken and those fridges need spare parts and service.
Figure 18, below, summarizes the complexity of the broiler supply chain.
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Figure 18: Broiler supply chain.
Source: MyCC (2014, p. 10).
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4. Pre-covid19 issues and challenges
As shown in section 2, the margin of broiler production is pretty thin. Therefore, while chicken
meat is the most popular and cheapest source of meat protein among Malaysians, the
industry is increasingly challenged to produce new innovative products at lower costs,
without compromising on quality.
In the broiler cost production, feed counts for around 62% and therefore production is highly
affected by the oscillation in feed prices (the relative incidence can go up to 70%). According
to Malaysian Feedmillers Association (MFA), Malaysia imports around 85% of the feed
ingredients, while only 15% is locally produced. While the main feed ingredients (cereal
grains, protein meals, fats & oils, minerals and vitamins, feed additives and miscellaneous raw
materials like roots and tubers) are mainly imported, the locally manufactured components
are mainly made of rice bran. It has to be taken into account that corn contribute 40 to 60%
of the energy content of the feed, while soybean is the main source of protein (20-30%).
Malaysia feed industry relies on 100% imported corn, coming primarily from Argentina and
Brazil, but also from USA, Thailand, Myanmar, Pakistan and Indonesia (Malaysian Feedmillers
Association, 2015).
The second cost component in broiler production is DOCs (16-17%). Therefore, feed and DOCs
together count, in Malaysia, for almost 80% of the broiler production cost. In the region, such
relative incidence is higher only in Thailand, where feed counts for around 65% and DOCs for
more than 25%.
Figure 19: Typical poultry feed mix.
Source: Lim (2015).
Together with profitability, another challenge comes from the fact that the domestic market
is by nature limited by the population size and it has already reached its maturity; as
mentioned, in fact, Malaysia is already the third country in the world for per capita
consumption of chicken, following Israel and United States. Therefore, in the recent years we
have observed production capacity growing at a declining place.
21
Figure 20: Yearly production growth rate.
Source: I3investor.com (2017).
The biggest poultry players are responding to the challenging of the domestic market by
diversifying their portfolio of activities, by introducing new technologies and by entering
younger markets with bigger growth prospects. In example, the Japanese fast-growing
convenience store chain FamilyMart in Malaysia is owned by QL Resources Bhd and
Maxincome Resources Sdn Bhd; the two Malaysian groups have a 20-year agreement with
FamilyMart Co. Ltd. Currently QL plans to open 300 stores by March 2022 (7-Eleven remains
the biggest player with 2300 outlets) (Yunus, 2019 and Inside Retail Asia, 2019). Leong Hup,
instead, chose the way of expanding in bigger and growing markets, setting up operations in
Indonesia, Philippines and Vietnam.
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5. Covid-19 and the MCO: challenges and risks.
It is now time to discuss the potential economic effects of covid-19 and the movement control
order (MCO) on the poultry industry
5
.
Worldwide, covid-19 is posing serious challenges to the agriculture world. «Some countries
have placed trade-restrictive measures, while others have issued tenders for more purchases.
Consequently, prices have rallied for both wheat and rice, even though global supplies are at
record levels and the share of stocks to consumption is historically high» (USDA, 2020a, p. 1).
However, while wheat trade is expected to reach record high in 2020 (USDA, 2020a, p. 1),
global rice exports are expected to globally decline 2%, in particular because of the
restrictions imposed in many Southeast Asia countries and the impact of lockdown policies
(USDA, 2020a, p. 10).
The international trade of chicken and livestock in general is going to be affected too. «Global
export forecasts for beef and chicken meat trade have been trimmed due to emerging threats
from the spread of the COVID-19 virus. Economic growth forecasts have been cut for 2020
and the impact on consumers will dampen demand for animal protein. Widespread closures
of restaurants and food service outlets as well as a reduction in tourism and travel will shift
demand for protein among both types of meat as well as cuts. Furthermore, shipping
disruptions have already impacted global trade by clogging ports and reducing container
availability, at least in short run. Full impacts are likely still to develop, but the livestock and
poultry sectors’ response at all levels of the supply and distribution chain are likely to impact
supplies in the future» (USDA, 2020b, p. 1).
Figure 21: Export forecasts for beef, pork and chicken in 2020.
Source: USDA (2020b, p. 1).
In particular, the forecast for global chicken meat production is revised 2 percent lower to
100.5 million tons; the growth in China cannot fully offset the lower production forecasts for
5
For a summary of the Malaysian MCO-related policies and the following stimulus packages, see Ferlito and
Perone (2020).
23
all the other major producers. However, the forecast remains one percent higher than 2019,
as chicken meat demand typically anticyclical: in difficult moments, people turn more to
chicken, which is a low-cost and fast-to-produce source of proteins (USDA, 2020b, p. 2).
According to Rabobank too, a further drop in pork production in Asia this year could lead to
potential growth in local poultry production and international trade, if rising supply chain
challenges could be managed: poultry demand could benefit among the proteins, due to its
price competitiveness (McDougal, 2020).
Global chicken meat trade is revised 4 percent lower to 11.7 million tons on downward
revisions for all major exporters except Brazil. As a result, world chicken meat trade will
contract 1 percent in 2020 compared to last year despite minor gains by Brazil and the United
States.
Being self-sufficient, Malaysia is unlikely to be affected by such decline, but it may face a
reduction in the export toward its main buyer, Singapore, which is trying to gain
independence on poultry product production, in particular on eggs
6
.
In this scenario, a discussion on the nature of the crisis we are experiencing will be helpful.
An economic crisis can be endogenous or exogenous.
In the first case, it originates from within the economic system, from elements which can be
defined as economic; it is the case, in example, of the 2007-2008 economic crisis, which was
generated by the interaction between the housing and the credit markets, and eventually
supported by favourable monetary policies. In the second case, instead, an economic
downturn is driven by phenomena which are not primarily economic; it can be the case of an
earthquake which destroys the production capacity of a certain region, or a war. With covid-
19, I believe, we are experiencing a third type of phenomenon: surely, coronavirus is an
exogeneous element and it should fall under the second category; however, contrary to what
happens with a war or a massive natural disaster, covid-19 would be unable to produce
economic instability per se, beyond some directly affected industries, such as aviation and
tourism; in fact, if we look at the reality under observation, we can note the following steps:
- The MCO was introduced during the second half of March 2020, following the example
of what has been done in Wuhan and Italy and it is foreseen to last at least until 28
April.
- The impact on the economic system is not coming from the virus but from the
implementation of policies designed at least, this is the hope to fight it.
- Thus, MCO is the real cause of economic problems for those industries that were not
directly affected by the covid-19 spread (such as tourism, aviation, etc.).
- Then a policy (MCO) forced the government to design another policy (the stimulus
package) in order to fight the negative effects of the first one.
6
A $30 million grant has been launched to help local farms ramp up their production of eggs, leafy vegetables
and fish over the next six to 24 months (Liu, 2020).
24
It may argued here that there is trade-off between saving human lives and saving the
economy, but such an argument is based on a false assumption: the idea that the economy is
an it, while people are he and she; however, it is not like this, the economy is very much made
of he and she, it does not exist as a it
7
.
Moreover, it can be demonstrated that the MCO is not statistically significant as an
explanation for a low or a high level of cases and mortality (although I always prefer to discuss
that deaths as the number of cases is influenced by the number of tests). Google is monitoring
the presence of people in selected spaces, such as restaurants, parks and workplaces; then it
measures how the presence of people has been reduced because of the different lockdowns.
We can hint that where the drop was higher, the lockdown was stricter or more strictly
followed, while in the other cases it was more relaxed. The table below summarizes the
finding for Southeast Asia.
Figure 22: Mobility drop* in Southeast Asia and Covid-19 cases and deaths**.
* As per 11 April 2020.
** As per 22 April 2020.
Source: https://www.google.com/covid19/mobility/ and https://www.worldometers.info/coronavirus/.
Figure 22 shows that the number of deaths per million people is lower in those countries, like
Thailand and Vietnam, where we encounter a lower level of restrictions, when compared with
more strict countries such as Malaysian and Philippines, where the deaths per million people
were 3 and 4 respectively (versus 0.7 in Thailand and 0 in Vietnam). While we cannot argue,
of course, that the lockdown is a cause of death, at the same time we cannot conclude that
the lockdown per se is a significant explanation for a low or high number of deaths. The
successful cases of Thailand and Vietnam has to be explained in a different way.
7
As Professor Horwitz (Ball State University) put it:
«We need to stop creating a false dichotomy between ‘economic costs’ and ‘human costs’. All economic costs
are human costs and all human costs have economic costs. What do you think the economy is, if it’s not a
complex adaptive system of human interaction? And when we make choices as humans, or choices about policy
that affect humans, we have to recognize those have economic costs as well.
For example, I do not know if shutting down the US economy as we have is the best way to fight this disease. I
DO know that those economic costs also come with human costs as unemployment and poverty (even short
term) are associated with all kinds of negative physical and mental health outcomes. Some people will get sick
and die because of the lockdowns. Whether it's the right policy, I'm not sure. But note the intertwining of
economic and human costs.
Again, the economy is human beings and every human choice has an economic dimension to it. To treat the
economy as somehow abstract from actual flesh-and-blood humans has been the problem with mainstream
economics for almost 100 years. Don’t make that mistake».
25
Another element of reflection needs to be added: numbers and a lot of observation matter;
as pointed out by Alexis Carrel, Nobel Prize for Medicine winner in 1912, few observation
and much discussion are conducive to error: much observation and little discussion to truth”
(quoted in Giussani, 1997, p. 3). Even if we do not look at the number of cases, which is deeply
affected by the number of tests, the situation in Italy and the one in Malaysia are very much
different: if we look at the number of deaths per million of people, Spain stands at 409 (15
April), Italy at 358, while Malaysia scores 3. The world average is 17.6. Does it make sense to
replicate the Italian policies in the Malaysian scenario? Are we not overreacting? The question
is all the more stringent if we consider that at the 6th week of lockdown Italy still records an
average of 5-600 deaths (not cases) per day. The chosen path may not be the right one.
I believe that both the MCO and the stimulus package are moving in the wrong direction. The
main effect of the MCO is a heavy disruption in the supply chain; the situation is made more
dangerous by the division between essential and non-essential services. As it is easy to
imagine, such division is pretty artificial and, while certain black and white areas can be
identified, the grey spots are the great majority. The implementation of the MCO as it is
designed can create the biggest supply-side crisis we ever knew by bringing important
disruptions to the supply chain.
Let us make some examples based on what we have seen in the previous paragraph.
Example 1
- Chicken production is obviously to be considered among the essential services. We
can easily imagine then that chicken farms, slaughtering houses and chicken
processing factories are still in operation.
- What is ‘essential’ to keep these services running and operational? Think about a
broiler house and think in example that feed is stored in steel or fiberglass feed bins
and those bins are connected to the feeding line through plastic pipes, metal augers,
motors and so on…
- Now, it can happen that a motor breaks down and it needs either to be repaired or
replaced: what does it happen if that motors cannot be replaced because the
production of motors is not considered essential or if the logistics required to bring
that motor to the farm is not among the essential services? Feed cannot be supplied
to the chicken…
- What if a fan or the central control system break down? Similarly, the farm will suffer
chicken mortality.
- Chicken mortality means less supply to the supermarkets precisely when the demand
is growing, generating a supply/demand conflict (shortage) which will push prices
upward and leave someone unfed.
Example 2
A similar effect can be created if, in example, the food processing factory cannot get the
plastic containers or all the paper packaging products that are necessary to bring the ready-
to-eat chicken to the stores. How can we decide which plastic is essential and which one is
not?
26
This is more than a theoretical example. The panic buying which happened in Malaysia just
before the movement control order (MCO) saw an increased in branded egg demand.
Fact 1
LK Fresh Egg’s Managing Director Tan Leng Yee told Asian Agribiz, “We are experiencing a
300% surge in demand from our retailers since the panic buying started. I would assume the
same for other branded eggs as opposed to loose eggs. However, we do have constrains
with packaging materials (trays, cartons, boxes) since there’s been disruption in the supply
chain since the MCO.” (Ramanee, 2020b).
Example 3
Another example can be even more significant: feed needs to be imported, but what will
happen if it cannot be moved out of the port fast enough because of the congestion created
by the fact that some logistics is considered non-essential?
These examples are reported to show how the damages to the poultry industry created by
the MCO are mostly related to the failure to recognize how vertically and horizontally
integrated and complex is the supply chain that links raw materials, intermediate
manufactured products, livestock production and the final consumer. Again, there is much
more than birds, land, water and feed.
To summarize, as Gordon Butland (2020) put it, the potential consequences brought in by
covid-19 and the different global MCOs can be divided into the following categories:
- demand
- logistics
- labour availability.
Demand effects
The most obvious effect on the demand is that with travel restrictions and movement control
orders people will not dine outside, with high effects on the chicken request from restaurants
and fast food. Butland (2020) gives us a good example of how internationally related are the
supply chains.
Fact 2
On 22 March, 2020 McDonald’s in the UK has announced that it is closing all stores including
drive-throughs and this will affect about 1,500 tons/month of further processed product
from Thailand.
Butler (2020) adds that the ability to estimate demand trends is very important, considering
that the short-term cycle in the industry is about nine weeks from setting eggs to finished
product.
In this scenario, the movements of supply and demand and the consequences on prices are
very volatile:
- Demand from restaurants will drop (downward pressure on prices).
27
- Home consumption demand will increase, as chicken remains the cheapest available
source of protein (upward pressure on prices)
8
.
- Supply chain disruptions are going to create supply side difficulties, adding volatility
(upward tension on prices).
- It is not clear which of these pressures will prevail and we will observe different
movements in different countries.
Supply chain effects
The effects on logistics and supply chain have been hinted in the previous paragraphs. As
previously experienced in China, Malaysian ports are now congested and the authorities need
to allow ad hoc outgoing operations for non-essential items to avoid the impossibility for the
essential ones to reach the consumer.
- In China, no labour was available to unload vessels and transport the products.
Internally, feed could not be delivered to farms, leading to large losses, and
ingredients could not be delivered to feed mills.
- The market for vitamins and feed additives could be affected as well, as most of these
products originate from China
9
.
- The unprecedented reduction in the global airline traffic could leave some producers
without breeding stock and hatching eggs
10
, which are not locally produced by each
country
11
.
Labour effects
Labour is another aspect to be considered.
- White collars can work from home.
- Factory and farm workers need to be present at the workplace, creating
agglomerations of people living in close proximity.
8
The combination of increased home consumption and lockdown policies is expected to drive the global food
delivery industry to reach USD 164 billion by 2024, with an annual revenue growth of 7.5% (Friedrichs, 2020).
9
Recently, Evonik, a major supplier of amino acids, declared force-majeure for the delivery of ThreAmino, the
third most important amino acid.
10
See also Vorotnikov (2020).
11
In example, Malaysia exports parent stocks to Nepal (Bhattarai, 2015, p. 300)
28
6. MCO: a way out?
It is very crucial for Malaysia to avoid a halt in the poultry industry. Currently, Malaysia has a
chicken stockpile of 59,000,000 chickens (consumption: 43,000,000 chickens a month), and
eggs stockpile of 800,000,000 eggs (consumption: 620,000,000 eggs a month) (CNA, 2020).
While there is no sign of poultry production being interrupted under the current MCO, it is
more likely that issues will emerge the longer and the stricter the lockdown will be. Time is
crucial.
If we have to look at the main flaw in the MCO, we have to say that it is the inability to
recognize the complexity and the integration of the supply chain with regard to the food
supply. While focus is maintained on the importance to keep food production alive, it is not
realized the complexity involved in such a statement.
It is very difficult to identify a quantitative dimension of the impact that MCO will have on the
industry, as the involved variable are too many and time remains the main factor with all its
load of uncertainty and novelty creation.
The poultry industry in Malaysia is very well consolidated and we do not see survival threats
for the main players in the industry. However, they will remain in the conservative mood for
a certain amount of time, freezing investment in new plants and technologies, with the
impossibility to promptly face a surge in demand in the post-covid scenario, and as a
consequence a price hike due to a supply shock.
During the MCO period, instead, what the industry can most likely face is the lack of some
important parts in the production chain, generating a sort of hip-cup interruptions in the
production process and, ultimately, if the lockdown is prolonged beyond the expected period,
the impossibility to deliver final products to the supermarkets, generating shortages and thus
price increases.
Considerable harms, instead, can be produced on equipment producers and all the other
intermediate stages in the poultry production. While MITI was able to grant a certain level of
operations for those who are manufacturing, the companies who are providing sales and
service assistance are still waiting for any sort of answer or are gradually experiencing
rejections. The supply of spare parts, in particular, is becoming peculiarly critic because of the
disruptions both at entry and exit level at ports and airports. Even logistics operators are
asking the suppliers to waive them from any responsibility as they refuse to take responsibility
of transporting products which may not be considered as essentials. Some of these suppliers
may thus decide to re-shape their presence in Malaysia, diminishing their level of engagement
and therefore dragging FDIs out of the country, while waiting for better times to come. This
is all the more true at the light of the fact that Thailand and Vietnam are openly discussing a
re-opening strategy, involving business people in the decision making process, while Malaysia
seems to be led only by medical considerations, such as the utopia of reaching 0 cases before
lifting the MCO. More than one MNC in the poultry value chain is considering to relocate in
countries which seem to be open to warrant a future for business (and jobs).
29
At confirmation of this there is the fact that worldwide foreign direct investment is on track
to decline by 40 percent this year, according to the United Nations Conference on Trade and
Development. This threatens “lasting damage to global production networks and supply
chains,” said the body’s director of investment and enterprise, James Zhan.
30
7. What to do?
At the light of what we have seen so far, it emerges that the key challenge at the moment is
not to keep poultry farms operational per se, but to avoid essential disruptions in the supply
chain that can force operations to scale down, posing the following risks:
- Delivery of the essential supply of food to final consumers (short run) with two
additional sub-effects:
o Job losses;
o Price hikes;
- Withdrawal of MNCs operations (FDIs) from Malaysia (medium run).
In order to avoid the above mentioned risks we propose the following measures:
Reintroduce logistics among the essential services.
It is clear that, if distinguishing between essential and non-essential services is easier in theory
than in practice, the distinction becomes even more complicated when we have to apply it
directly to logistic operations. The recent congestions at ports and the partial extension of
operations is the proof that the distinction has more value on the theoretical level than on
the practical one.
The first and most urgent and easy measure to be adopted is thus to reintroduce logistics
each kind of logistics among the essential services.
Rapid feedback from MITI for the industry-related firms.
While those equipment suppliers with some extent of manufacturing operations were able to
receive a feedback from MITI about the allowed scale of their operations in around ten days,
the MNCs with smaller local presence are still waiting for news, while MITI officers are
unreachable both via email and via telephone and we are already half way into the MCO.
Certainty of what can be and what cannot be done is key in order to smooth operations and
avoid business panic. In order to implement this point, we can imagine an exemption to the
MCO granted on a Self-Declaration basis for businesses meeting certain criteria, including
contribution to the supply chain of essential goods.
Gradual lift-up of MCO under strict sanitary conditions.
The most effective way to fight back the potential supply chain disruptions is to re-allow
operations for them. As the covid-19 emergency is unlikely to be over in two weeks, the risks
of a prolonged MCO on the economy are too high to halt the system as it is happening now.
Therefore, we need a clear strategy to bring the economy back to normalcy gradually, but
with greater speed. As recently suggested by IDEAS (2020), the government, on the advice
from public health authorities, should create a zoning system for production clusters or
territories as a basis to gradually allowing employees to return to work and businesses to
resume operating. Better location-based targeting can also allow the government to expand
the list of exempted sectors to include vital enabling industries and supply chains which have
been coming under strain. At the same time, incentives could be provided to encourage
business compliance on mandatory testing of all staffs and other precautionary measures like
31
employees taking temperature before entering business premises or extensive sanitation of
workplaces. In this context, state governments and relevant regulators should be empowered
with well-defined roles.
It is clear that support on testing and sanitation will be much more effective that generalized
subsidies, which are short-lived and dispersive by nature.
In addition to exemptions granted on the basis of industry (mentioned above), the
government could start to identify Green Spots of very low levels of infection. Employees
living and working in these green spots could then be eligible for Self-Declared exemptions.
Exempted businesses would have to comply with strict Testing and Control Protocols
including mandatory testing of all staff and other protocols such as routine temperature
taking.
The costs of testing and eligible medical equipment (e.g. thermometers) could be made tax
deductible.
Fiscal incentives to automation.
The present economic situation can become an opportunity to look for further ways to
automation. In the Malaysian poultry industry, some steps enjoy a high degree of automation,
while others are still labour intensive. In example, a hatchery is fully automated except at the
very beginning, when fertilized eggs reach the hatchery, and the end, when DOCs are
transferred into transport boxes. Recognizing the potential risks posed by massive
concentrations of workers can be a further incentive to introduce capital-intensive processes
where they are still absent.
A clear incentive strategy on this point can be implemented, favouring a further technological
jump in the poultry industry in Malaysia.
32
Points of reflection and action for the Selangor government
1. The poultry value chain in Malaysia and Selangor
It was noted in the previous sections that several multinational companies in the poultry value
chain (mainly equipment and animal health) established their regional hub in Malaysia. Why
Malaysia? The main reasons behind the choice are:
- Political stability.
- Good infrastructures.
- Strategic geographical position.
- Availability of well-educated and English-speaking human resources.
- Reasonable cost of living.
- Fair tax system.
Among these MNCs, many chose a location in Selangor. It is important to note that Selangor
is the more dynamic State of the country, the actual business hub, and it grants access to
ports and airports without facing the city centre traffic jam.
2. Agriculture in Selangor
Only a limited number of direct agriculture activities are conducted in Selangor. This is due to
historical reasons, which drove the state in a different direction. With the current economic
organization of the state and the current population density, to increase farming in Selangor
would not bring the expected results.
However, important and essential pieces of the poultry value chain are located in Selangor
and are bringing added value in terms of job creation and economic growth. Some of them
are active with limited facilities, while others invested in logistics and production plants. It
would be beneficial for the state to help increasing the number of poultry related MNCs
within its territory and to expand the size of operations of the ones already present.
Practical points of action are:
- Coordinate with MIDA for the extension of the “principal hub” program benefits to
small and medium enterprises, which are the great majority.
- Support the hiring process between a communication platform between the firms and
the numerous colleges and universities located in the State; usually, only big
companies have access to colleges “career days”.
- Develop training activities for local workers, in order to improve the following skills:
o English communication both in speaking and formal writing.
o Inter-human relationships.
33
3. Automation
In the current scenario, incentive to the creation of innovative production processes are
crucial
12
.
A coordination between federal and state governments in order to implement a sound fiscal
incentive scheme specifically oriented toward automation would be welcome and it would
attract more multinational companies.
12
See Ferlito (2020).
34
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http://www.ideas.org.my/brief-ideas-no-20-covid-19-and-the-mco-an-exit-strategy-for-malaysia/ IDEAS welcomes progress in combatting COVID-19 and encourages the government to develop an exit strategy for the eventual end to the Movement Control Order (MCO). In our latest paper written by IDEAS Senior Fellow, Carmelo Ferlito and and Gaetano Perone, Research Fellow at the Department of Management, Economics and Quantitative Methods of the University of Bergamo in Bergamo, Italy, we’ve proposed several steps. In the short run, we must bring the economy back on-line as quickly as possible, prioritising networked industries. Specific recommendations include: To include logistics as among the essential services Provide rapid feedback from MITI for the industry-related firms. In the medium-run develop protocols for lower restrictions under strict sanitary conditions. Specific recommendations include a gradual relaxation of MCO under strict sanitary conditions (including mass testing), as recently proposed by Dato’ Seri Azmin Ali. In the medium and long-run the government should accelerate adaptation by firms, to cope with prolonged disruptions. Specific recommendations include fiscal incentives to automation, to reduce dependence on a large labour force.
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Challenges and opportunities: awakening domestic creative entrepreneurship, «Ideas.org», 20 March 2020, http://www.ideas.org.my/challenges-and-opportunities-awakening-domestic-creative-entrepreneurship/.
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The domestic demand for broiler meat is one of the highest in the Malaysian markets. The industry requires continuous evaluation to identify the existing problems and improves its competitive advantage. Thus, economic analysis of this sort will continue to update current statistics on production cost, output and profitability. Following this, the study, therefore, aims to assess the existing financial condition of farmers, marginal cost of production, total net income and input-output ratio of broiler production in different regions in Peninsular Malaysia. The study used multi-stage sampling in selecting 310 operators from Southern, Northern, East Coast and Centeral regions. The analytical tools include descriptive statistics and farm budget. The findings disclosed that the broiler farm incurs major cost from acquiring operating inputs especially feed. The operations in the East Coast region was almost unprofitable for the reason that feed conversion rate is more than 2 resulting in higher production cost. But the other three regions indicate positive returns based on the estimated input-output ratios of 1:1.09, 1:1.17 and 1: 1.23 for Northern, Southern and Central regions, respectively.The study advocates for both managerial and policy measures that will help cut the cost of production to attract more investors and increase export.
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This chapter examines a supply chain development under conflict conditions and lays out the management strategy and tactics of an integrated set of Nepalese firms that has emerged as the market leader. The supply chain problems of a decentralised and scattered activity of poultry-keeping as it moves from a form of backyard farming to an industrialised factory farming form in a highly constrained contextual setting have been discussed. A comprehensive longitudinal case study accompanying focused group discussions, on-the-site observations, and in-depth interviews with the executives found a sustainable model of the supply chain and lessons for its management. Thorough analysis of supply chain management practices along with routine activities of the executives of the Valley Group of companies and analysis of the business operational circumstances found that a very small firm selling 13 kg of broilers’ meat in 1981 became the market leader one and a half decades later, and continuously enjoyed this leader status even in the context of political insurgency, economic turmoil, and social unrest. Contextual factors like geography and demography, political movement and change, culture and customer tolerance, technology transfer and transport infrastructure are examined and overviewed. In addition, market and industry, quality standards and actors’ awareness as well as regulatory requirements, critical issues and challenges for managing supply chains in the Nepalese poultry industry are analysed. The longitudinal case study also looks at the application of the selected supply chain theories in the context of the developing country.
Malaysia's broiler chicken industry status report, «Asian Poultry Magazine
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Covid-19 and the protein industry, «Asian Poultry Magazine
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G. Butland (2020), Covid-19 and the protein industry, «Asian Poultry Magazine», https://asianagribiz.com/covid-19-and-the-protein-industry/.
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Recalibrating the meat industry amidst Covid-19, «Asian Poultry Magazine
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D. Friedrichs (2020), Recalibrating the meat industry amidst Covid-19, «Asian Poultry Magazine», https://asian-agribiz.com/recalibrating-the-meat-industry-amidst-covid-19/.
Meat Consumption Trends in Asia Pacific, and What They Mean for Foodservice Strategy, «Euromonitor
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