Agri-food sector

Agri-food sector

- Broiler and swine prices stable, shrimp price down 9% MoM
- Tuna prices continued to rebound rapidly in June, good for TUF
- Top picks for July: TUF and CPF

Stable broiler and swine prices in June. Domestic broiler price in June was Bt42/kg,
unchanged from May. Domestic swine price has been stable at Bt80/kg for some time.
Shrimp price in June down - but now worried about exports. Shrimp price was
Bt215/kg, -9%MoM, down for the third month. This signals better domestic supply but
now the industry is facing concerns about exports, hit by two factors. First is the issue
of human rights abuses in Thailand’s seafood supply chains, amplified by a downgrade
of Thailand by the US State Department to a Tier 3 (government not helping to stop
slavery) ranking on its 2014 Trafficking in Persons (TIP) Report. Second is Europe’s
change in its GSP. This has jumped duty in shrimp imports to 20% from January 1, 2014
from the earlier 7% and Thai chilled and frozen shrimp products will lose GSP benefits
from January 1, 2015, tripling import duty to 12% from 4.2%.
Moving around the problem. Buyers in Europe are beginning to source away from
Thailand because of the duties. At the same time, the EU is not their major export
destination (the US and Japan are). CPF will lose some of its export market for shrimp
but exports to the EU account for only 1.3% of total revenue. TUF’s shrimp exports
account for 5-6% of total revenue, which could hurt – except that it can bypass this by
using its U.S. seafood unit under Chicken of the Sea as the exporter to the EU instead
of Thailand. The primary hit at this time is sentiment for both CPF and TUF, but this is
short term and over the longer term, they will adjust, most easily by simply switching
the production bases from Thailand to other locations already in their portfolios.
Tuna prices continue to rebound in June, rising 15% MoM to US$1,710/ton, which is
a strong 45% rise from the March bottom of US$1,175/ton. This is good news for TUF
and we expect its tuna business to do well in 2Q14 and 3Q14. The lower prices give it
the chance to improve margin on its branded tuna and gain a larger volume of OEM
tuna and fill its inventory with lower-cost tuna.
Good news: Action on the foreign labor front. Thailand is at long last making a
serious effort to make foreign laborers legal, which will eliminate income for human
traffickers. The first move was to set up “One Stop” service centers in locations where
most of these laborers work, beginning in Samut Sakhon, home to a large number of
seafood processing plants. These centers are bringing the laborers out of the closet
and will make it easier to plants to hire – and keep – their migrant laborers. TUF’s
main domestic production base is in this area, but it had already legally registered its
foreign workers, so is not directly affected. We believe this will, however, be a longterm
benefit for all seafood producers when they want to increase capacity and need
more laborers.
Still favor TUF (Buy, TP Bt80) and CPF (Buy, TP Bt35), GFPT worth trading
(Neutral, TP Bt14.50). We expect these agribusiness giants to be able to step around
the negatives and continue to grow sales, particularly since they have operations
outside of Thailand that are not affected by sanctions by the US or EU. We thus see no
fundamental reason to change our recommendations or forecasts at this time.