The Chicken And Egg Challenge: Feed Prices Add To India's Inflation, Income Worries

Animal feed prices are adding to India's economic worries. They are pushing up inflation in categories where producers have pricing power, while straining incomes of those who can't pass on the higher costs.

Retail inflation rose to 6.95% in March, with inflation of cereals, vegetables, spices and protein-based food items like eggs, meat and fish being the key drivers, the Monetary Policy Committee said at its April meet. "Elevated global price pressures in key food items such as edible oils, and in animal and poultry feed due to global supply shortages impart high uncertainty to the food price outlook, warranting continuous monitoring," the MPC said.

Prices of inputs for animal feed have risen 30% in the past two months, according to Sanjeev Gupta, owner of Khusboo Poultry. Cost of soya and corn—sources of protein and energy—have jumped along with prices of bajra, rice and wheat, Gupta said.

For instance, wheat now costs Gupta Rs 26 a kilogram compared with Rs 18 per kg two months back, while Bajra costs Rs 21 per kg against Rs 17 per kg earlier. The rise in inputs is accompanied with a rise in fertiliser prices, packing and transport prices.

The rise in feed prices is completely and totally driven by the fact that the raw material prices have gone up a lot, said Sandeep Kumar Singh, chief executive for the animal feeds business and Maxximilk at Godrej Agrovet Ltd. Oil extractions are more expensive than what they were at the same time last year, accompanied with a rise in the cost of transport.

The ability to pass-through this higher cost of feed differs from item to item.

A live chicken that weighs about two kg requires about three kg of feed over a 40-day course, said Ramesh Chander, the president of the Poultry Federation of India. With prices of feed having surged 40% in the last two months, the cost of chicken has risen from Rs 80-95 per kg to Rs 110 per kg now—an increase of 15-35%.

According to data by the Ministry of Statistics and Programme Implementation, inflation in chicken rose to 20.7% in March 2022—the highest since December 2020.

While those selling chicken have passed on a higher share of the increased input costs, egg farmers are bracing for a hit to earnings.

Retail inflation in eggs has remained low and prices have fallen below the cost of production as supply has been strong and demand muted.

The cost of production of eggs is currently at about Rs 4 each while the farmer is currently being able to sell for Rs 3, according to Gupta. Demand for eggs was low in March because of seasonal fluctuations and Navratri. Irrespective of what demand looks like. "Murgi hai, anda toh degi [A hen will lay eggs no matter what]."

Singh agreed. "For any egg farmer, our ability to pass the price increase is very poor."

The situation is marginally better for milk. There is higher pass-through in prices there, Singh said. Prices of milk rose 4.78% in March over a year ago—the highest since November 2020.

While feed-producing industries are trying to absorb some of the rise in prices to keep feeds affordable for livestock farmers, some pass-through will happen when there is a material movement in prices, Singh said.

The poultry industry is sensitive to variations in input prices, mainly feed, which accounts for about 70% of the variable costs, said a note by ICRA Ltd. published in March 2022. The industry has already seen operating margins contract sharply by 350 to 450 basis points in FY22, it said.

The outlook will now depend largely on sowing, said Singh. A normal monsoon should ease supplies and prices. Still, domestic prices will continue be influenced by global costs. It will still be a few months of pressure before we see some sort of relief on this, Singh said.

In the longer run, supply of feed will need to align with increased demand.

The feed industry, in last 10 years, has grown at a rate of 6-7%, Singh said. While demand is reasonably strong, the production of an ingredient like soya remains flat at about 11-12 lakh metric tonnes, he said.

As such, there is need for a push to improve yield in some categories. If not, this spike in inflation will become a more regular occurrence, Singh said.

"Poultry khatam hoti ja rahi hai [Poultry business is diminishing]," Chander said, explaining that he has ceased his poultry operations for now since he in unable to realise the costs. Small poultry farmers, not surprisingly, have suffered more than larger businesses that benefit from economies of scale, he said.

"Pehli lockdown main, murge dabaane padhe the, aur aab ye. [In the first lockdown, we had to bury chicken because we could not sell, and now this input cost increase]," Chander said.