Exploring Cost Breakdowns — Of Cheep Cheep Christmas Meats

Spend Matters welcomes a guest post from Nick Peksa of Mintec Ltd.

As we are fully in the festive swing, it is interesting to look at the various meats that are consumed over the Christmas period and try to understand some of the relevant costs behind these products.

In much of the world, the traditional Christmas lunch will be turkey (France is one Europe's largest producers), goose and chicken, whilst in many other EU countries (such as Germany, Latvia and the Czech Republic) pork will be the dish of the day. In Greenland, the interesting dish of Kiviak may be served (Kiviak is the raw flesh of an auk, buried whole in sealskin for several months).

It is useful to understand the costs involved in the production of an animal before it ends up on the dining table.

Cost of Animal Husbandry
The major factors that affect the end cost of animal husbandry include cost drivers such as feed materials. These are closely linked with the lifespan of animals, which influences how much feed they will consume over their lifetime. Space is also a consideration, as the smaller the animal is, the more animals you can produce per square metre. Another consideration is whether or not the land could be used for something more profitable.

There are, of course, other costs associated with animal production such as energy, transportation, medication, and farm labour. With regards to the end price of the animal, we also have to consider the supply and demand situation at the time and point of sale.

All these costs can be categorised as either variable or fixed. Variable costs (for items such as feed, medication and casual labour) can be controlled to some extent and are not incurred when there is no production. Fixed costs (for items such as taxes, insurance, interest, and depreciation on buildings and equipment) are incurred whether or not there is any output.

For our example we will look a little deeper into the major cost driver that would affect chicken prices. Let's start with the current market situation.

Exploring Chicken Markets:
Brazil's exports of chicken meat totalled 3.2m tonnes between Jan-Oct of this year, an increase of 1.5% on the same period of 2010. Brazil's chicken exports reached USD 6.7bn over the same period, an increase of 21%. The Middle East remains the main buyer of Brazilian chicken with 1.2m tonnes, next came Asia with 0.93m tonnes. The EU accounted for 0.4m tonnes. EU chicken imports from Brazil could be set to rise dramatically however if an ambitious association agreement between the EU and Mercosur (Argentina, Brazil, Paraguay and Uruguay) for which talks started last year, is finally agreed in the months ahead.

But if we want to explore the costs we need a better understanding of the average costing for broilers.

Summary of the cost structure of broiler production, weighted all flock results

Summary of the Cost of Chicken
From the figures above and depending on the efficiency of the manufacturer, 50-70% of the total cost of a chicken is the cost of the feed. Each chicken requires around 130-200g of feed a day (depending on species).

It is worth considering that the lifespan of a broiler is normally around 7-8 weeks. This reduced feed cost should, therefore, already be visible in a reduced cost for our ready meals, chicken sandwiches and chicken cuts to some extent. Should our chicken prices be getting cheaper?

Is this something that has been reflected in your pricing?

-- Nick Peksa, Mintec Ltd.

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