Sri Lanka's poultry industry has been squeezed by taxes on imported maize which pushed feed costs up and price controls on processed chicken which worsened a downturn in the industry, a top agricultural firm has told Lanka Business Online.

Ceylon Grain Elevators group, a unit of Singapore's Prima, said an economic slump in early 2009 reduced demand for chicken as consumers ate out less and tourist arrivals also plummeted.

In the annual report to shareholders, chairman Primus Cheng Chih Kwong stated: "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.

"Lacklustre 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, processes and markets chicken and produces feed.

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.

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

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

"On average, the landed duty paid cost of imported maize was approximately 30 per cent cheaper than maize purchased in the local market."

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. It 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 per cent market share.

"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 per cent 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.

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," Mr Primus said.

"But, with a stringent Government price control of 320 rupees 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."

According to Lanka Business Online, in 2008, the group lost 125 million rupees (LKR). Grain Elevators says a price of LKR350 to 360 a kilo would have helped the industry. Minister Bandula Gunewardena said last week that an LKR350 maximum price had been allowed for processed chicken.

This year, the firm ended with LKR125 million in profit, though revenues fell from LKR7.2 billion to LKR6.8 billion as interest expenses fell to LKR120 million rupees from LKR217 million.