"The poultry industry is anticipated to be over capacity in the coming years due to the rapid expansion of key players in the market and in view of this we expect margins will be affected in the coming years," Cheng Chih Kwong, Primus chairman and chief executive told shareholders in the annual report.
"However, to maintain its leading position in the country, the Company has to refurbish its facilities to improve productivity in the coming years, and at the same ti me expand its capacity in line with the market demand."
Three acre farms produces day old chicks and also markets processed chicken and runs an out grower scheme. Its parent, CGE runs a feed milling business.
TAFL, said in the fourth quarter 2010 the state has intervened to increase the supply of day old chicks which had led to an oversupply in the first quarter of 2011."Subsequently the market showed a shortage of demand for poultry products in the 2nd and 3rd quarter of 2011, when major players were forced to scale down their operations to reduce losses," the firm said.
"Consequently when the market normalized around the final quarter of the year, the local production was insufficient to meet the demands for day old chicks.
"These fluctuations in demand pattern greatly contributed to increased operational costs within the Company and the poultry industry as a whole."
Sri Lanka has restrictions in the import of poultry products and ad hoc interventions are made by state entities. Protection prevents the creation of export competitive businesses and force the population to pay higher prices, allowing monopolies or oligopolies to build up.
The industry is growing despite state interventions, especially in the supply of maize.
One of the key problems facing the industry and adding to costs is an attempt by authorities to boost local production of maize through protection, which has created some of the highest prices for maize in the world as well as shortages from time to time.
"The shortage of raw materials internationally significantly affected the business, while Sri Lanka’s maize production was severely affected by adverse weather conditions, leading to lower supplies and higher prices on available maize in the market," CGE said.
"A restriction on maize imports, an increase in international commodity prices and high taxes on imports had led to higher operational costs."
Floods which damaged crops had pushed up maize prices to 45 rupees a kilogram in 2011, the firm said. There is a 35 percent cess tax on maize in Sri Lanka.
"Though the Government’s policy of restricting maize imports was aimed at assisting the local maize grower, the policy also allowed local farmers to manipulate supply and price," the firm said.
"In addition, due to poor post-harvesting practices and lack of storage facilities, a large proportion of the maize sold locally is not of the desired quality."
The industry also had to contend with weather which constrained growth in birds and disease.
Thought most Sri Lankan farmers who are not engaged in export business, but operate with heavy political backing and protection make low quality and expensive products, analysts say in the case of maize key buyers are also able to manipulate prices under import protection.
Ceylon Grain Elevators group had made profits of 387 million rupees, down 18 percent from a year earlier, with revenues rising 30.8 percent to 10.4 billion rupees and costs rising at a faster 34.9 percent to 9.66 billion rupees.