Demand Slump

"With the continued downturn of the economy during the early part of the year, we witnessed a strain on consumer purchasing power and reduced demand for processed chicken," chairman Primus Cheng Chih Kwong told shareholders in the annual report.

"Lackluster demand brought about a drastic scaling back of capacity in the poultry industry as a whole during the first few months of 2009."

The group produces day old chicks, does feed milling and also processes and markets chicken.

As demand for chicken fell, the industry was hit by a government decision to restrict the import of maize through high duties pushing up the cost of chicken feed.

"Though the Government’s aim was to assist the local maize grower, the policy has had a negative impact across the industry," Primus said.

"The local grower, unable to meet the demand and desired quality levels, compelled the industry to purchase maize at higher prices.

In early 2008 a commodity bubble fired by US Federal Reserve money printing peaked, sending food, petroleum, base metals and precious metals to new highs not seen since the creation of the Fed, overtaking previous bubbles created in 1971 and 1980.

Commodity Taxes

The bubble collapsed in mid-2008, but Sri Lanka imposed new taxes on many imported foods to fill its growing budget deficit, denying price falls that gave citizens more disposable income and improving purchasing power.

Grain Elevators says due to poor storage and harvesting facilities a majority of the maize grown locally is not of good quality in addition to being expensive.

The firm had cut its own costs, trimmed capital expenses and looked to re-formulate feed with the use of substitutes. Industry feed volumes were estimated to have dropped to 432,000 metric tonnes in 2009 from 456,000 a year earlier.

The firm claims a 28 percent market share.

Consumer affairs minister Bandula Gunewardene said the government wanted to keep a price of around 28 rupees a kilo to encourage domestic production but that maize prices had gone up to 45 rupees or more after the import tax.

"It is true that many chicken farmers stopped growing chicken," he said.

"When eggs fell to around 5.0 rupees they found the cost of production too high and now there is a shortfall and prices are high.

"We need to allow imports if the price of maize grows too high."

He said the consumer affairs ministry had no plans to put price controls on eggs, though there are controls on processed chicken.

Sri Lanka's state heavily supports farmers with production subsidies and spends about 26 billion rupees a year on fertilizer subsidies and also restricts imports of rice, deliberately keeping food prices higher than the rest of world.

"In spite of cost saving efforts, a significant number of poultry farmers shut down their farms during the year," Grain Elevators said.

Three Acre Farms said day old broiler chicken production had been cut by 10 percent a month or 500,000 chicks and layer production had reduced to 0.05 million.

When consumer demand picked up later in the year there was not enough supply. The group estimates the current shortfall at around 500,000 broiler chicks a month and 50,000 layers.

Price Controls

But government price controls in processed chicken had badly hit poultry farmers, who would otherwise have been able to re-enter the industry with the help of higher margins, the firm said.

"In a free market state of affairs, supply and demand would readjust itself at a natural equilibrium benefiting both consumers as well as the producers," Primus said.

"But, with a stringent Government price control of Rs.320 for a kilogram of processed chicken, market instruments were unable to create this equilibrium.

"As a result, the market faced a shortage of processed chicken, while the industry lost an opportunity."

In 2008 the group lost 125 million rupees. Grain Elevators says a price of 350 to 360 a kilogram would have helped the industry.

Minister Bandula Gunewardena said last week that a 350 rupee maximum price had been allowed for processed chicken.

This year the firm ended with 125 million rupees in profit, though revenues fell from 7.2 billion rupees to 6.8 billion rupees as interest expenses fell to 120 million rupees from 217.

Sri Lanka's state has a history of heavy interference in agricultural markets. Before the entry of Grain Elevators into the market, supply disruptions of day old chicks kept the industry from growing.

As the industry grew, chicken which had once been considered a luxury good, became a relatively cheap source of protein for the people. Though there were monopoly concerns on feed milling at one time, other players had now entered the industry.