March 11, 2014
China's embattled broiler sector: It's not just about bird flu
Decades of slack demand growth allows Brazil to catch up to the world's second largest broiler producer.
by Eric J. BROOKS
An eFeedLink Hot Topic
The gods seem to have no mercy on China's poultry sector. The meat line everyone has resoundingly forecasted for the greatest market growth saw its output fall by 2.6% in 2013 and is on course to decline even more sharply this year. But was we shall see below, perhaps there is more at work than the misfortunes which command most of today's headlines.
Bird flu's damage…
Superficially, at least over the medium term, bird flu appears to explain everything: Last year's H7N9 bird flu outbreak wiped out 25% of the country's birds in three months, killed approximately two hundred people last year and several dozen more people since the start of 2014.
In late 2013, broiler inventory levels had just finished recovering when the same avian H7N9 strain struck again, alongside a few new viral variants, with new round of human deaths spanning everywhere from China to Canada. As a result, instead of rising by another 5% to 10% in the months prior to Chinese New Year like they do most Novembers, eFeedLink reports that by late January, China's broiler population was down 3% from its November level, and fell another 1.6% in February.
With warmer spring weather around the corner, bird flu's incidence in both chickens and people should subside, but the damage to China's broiler sector cannot be undone.
Instead of rising by 2.6% to 13.72 million tonnes as initially forecasted, the USDA now expects China's 2014 broiler meat production to fall by 3.4%, to 12.9 million tonnes. In a country where GDP increases at least 7% annually and incomes are constantly rising, this leaves broiler output and per capita consumption a shade above 2010's level of 9.3kg. Although broiler output fell by a sharper 14% during 1997's Hong Kong bird flu epidemic (which started with a chicken imported from China), 2014 will be the first time since China's early 1980s economic liberalization that broiler output will have fallen for two consecutive years.
...hides a larger, long-term trend
On the other hand, while bird flu explains the last two disappointing years, it cannot explain the entire time span since the year 2000. Thailand, for example, has a per capita GDP near US$10,000 just like China, but consumes about 50% more broiler meat per capita -even though Chinese eat at least 50% more meat overall than Thais.
Given the fact that when economic growth accelerated, per capita chicken consumption has taken off in other Chinese dominated societies such as Taiwan and Singapore, is there something deeper at work here in China's poultry sector?
Although growing much faster than its western counterparts, China's broiler sector has failed to meet its long-term forecasts -and risks losing its ranking among world leading broiler producers. Fifteen years ago at the turn of the century, the consensus was that China's broiler meat output and consumption would grow at annual rate of 3.5% to 4.5% annually for at least several decades.
Given China's 0.6% annual population growth and the way Chinese-dominated societies like Singapore and Taiwan saw per capita broiler consumption rise by more than 3% annually when their own economies took off, even the most pessimistic estimates assumed annual broiler meat output growth of at least 3.5% -but the last fifteen years have completely shattered these forecasts -Even during ten year stretches when bird flu did not strike the industry, China's broiler sector at best, performed slightly below even the most conservative expectations.
For example, based on USDA figures, from 2000 to 2004 when China's economic growth rate peaked, broiler output increased at a rate of 1.4%, less than that of pork -a red meat whose growth rate it was supposed to outpace. From 2004 to 2009, fuelled by an exceptionally acute shortage of pork in 2007 and early 2008, poultry consumption rose at a respectable 4.3% annual rate, partly making up for the disappointing pace of the early 2000s. But from 2009 to 2014, even with another domestic pork shortage taking hold in 2011 and 2012, broiler output increased at a partly 0.90% per annum.
Far from the optimistic projections made, from 2000 to 2014, China's broiler output only rose by 2.4% per annum. Even though China's swine sector had its share of serious supply-side problems, pork output (which poultry was supposed to outpace) grew at an average annual rate of 2.5% over these same years.
When we exclude the bird flu years of 2013 and 2014, broiler meat annual output increase averaged 3.3%. That is a lush, prosperous pace compared to Europe and North America's stagnant meat markets, but it is significantly below the 3.5% to 4.5% range that had been projected. Even after that disappointing first decade of the 2000s, in late 2012, the USDA projected China to produce 14.1 million tonnes of broiler meat in 2013 and 14.5 million tonnes in 2014 (earlier long-term forecasts had estimated 15.5 million tonnes for that year). Instead of giving the US competition for the most broiler meat production, China is only producing 12.9 million tonnes of chicken meat this year.
Brazil caught up before bird flu
China's disappointing chicken output growth can be best seen when it is compared to its BRIC country rival, Brazil. In the year 2000, China produced 55% more broiler meat than third ranked Brazil.
Brazil's per capita income is 13% higher than China's but its per year 2000 capita chicken consumption of 29.9kg (compared to 7.4kg for China) was four times higher. Fourteen years ago, Brazil's poultry sector faced a relatively mature domestic market of 168 million people, versus 1.2 billion Chinese who had huge potential to multiply their relatively low per capita chicken consumption.
China's far larger population, faster rising incomes and greater scope for expanding per capita chicken consumption all implied that that it should easily maintain or even increase its lead in broiler production over Brazil.
But that is not how things turned out -according to the Brazilian Poultry Association, Brazil's per capita chicken consumption jumped 58%, from 29.9kg in 2000 to 47.3kg in 2012. Over the same period of time, despite enjoying having faster rising consumer incomes and enjoying much far stronger long-term growth fundamentals, China's per capita chicken consumption rose by only 33%, from 7.5kg to a peak of 10kg in 2012 before bird flu made it slump back to 9.3kg this year.
With Brazil's consumers increasing their per capita chicken consumption 76% faster than China's and Thailand's own bird flu scare creating huge export opportunities, the unexpected happened: Brazil, despite its smaller, more mature market, has almost about caught up to China in broiler meat production. It is expected to produce 12.68 million tonnes of broiler meat, just a hair under China's 12.90 million.
Supply-side problems do not explain slack import demand
And there are several, highly interesting implications to this. First, bird flu cannot be blamed because the above chart shows that Brazil (with 85% fewer people) went from producing 65% of China's poultry output to 98% three years before 2013's H7N9 avian flu broke out.
Second, Brazil's exceptional export performance is not the reason it is catching up to China. Although exports share of Brazilian broiler production increased from 14% to 24%, with each Brazilian eating 58% more chicken per capita in 2012 than in 2000 and the population rising by 17%, Brazilians consumed 84% more chicken in 2012 than they did at the turn of the century.
By comparison, despite starting with per capita consumption four times lower than Brazil's and a much faster income growth rate, even before bird flu broke out in 2013, from 2000 to 2012 inclusive, China's domestic chicken consumption only increased by 44%.
Ironically, China's domestic market is supposed to be its greatest strength but in the case of the broiler sector, it is the industry's greatest weakness. Even this year, with broiler output floundering, the USDA slashed its China's chicken import forecast to 244,000 tonnes, down 3.7% and 7.4% from 2013 and 2012 levels respectively.
By comparison, the years since 2007 has seen many pork production shortfalls but they caused the country's pork imports to skyrocket. Similar exponential import growth occurred with milk powder when 2008's melamine in milk scandal caused cow's milk output to slump. Hence, China's disappointing broiler market performance has as much to do with slack consumption growth, as it does with bird flu type supply side disruptions.
In other words, China's consumers, for whatever reason, simply do not have the appetite for chicken that their Chinese speaking counterparts in other parts of Asia do. And that implies that a complete rethink about how chicken is marketed in China is required.
All rights reserved. No part of the report may be reproduced without permission from eFeedLink.
