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COMMENTARY & ANALYSIS

March 16, 2019
 
Is China's broiler sector finally rebounding?
 
Swine disease outbreaks coincide with an increase in grandparent stock imports to stimulate the largest poultry production and consumption increases in decades.
 
By Eric J. Brooks
 
An eFeedLink Hot Topic
 
 
The six years since 2012 have been hellish for China's broiler farms. A series of chicken food safety scandals at the start of this time gave way to dozens of bird flu outbreaks and human fatalities. The resulting large consumption falls, mass cullings and output decreases were subsequently cherry-topped with a ban on imports of grandparent white feather broiler stock from top America and European suppliers.
 
The latter made it more difficult to sustain chicken meat output: From 80% of Chinese broilers in 2014, white feather broilers' proportion of national inventories and chicken meat fell to 50% and 57% respectively. Less feed efficient lower meat yielding native breeds had to be substituted in their place –but could the tide finally be turning in favor of the poultry sector?
 
After five years of chronic outbreaks and consumption-constraining human deaths, the bird flu epidemic's waning coincided with serious outbreaks of African Swine Fever (ASF). The latter has severely constrained pork supplies. With pork making up well over half of China's protein intake and selling at a 45% premium to chicken, the ASF outbreak motivated a massive substitution of poultry meat in place of pork –and this dovetails with a large increase in Chinese broiler farming capacity.
 
Consumer's substitution of poultry meat in place of pork was immediately reflected in market price signals: From August 2018's initial ASF outbreak through the present time, Chinese retail chicken prices have stayed roughly 10% above their 2015-18 average. In its Livestock Tracker eFeedLink reports that AA white feather broilers sold for 11% more this February than in the same month of 2018.
 
Partly spurred on by these positive consumer demand fundamentals, partly by new grandparent stock sources, 2019's broiler meat production and consumption estimates have been revised sharply upward. Instead of rising 2.6% to 12 million tonnes, the USDA now forecasts chicken meat output to rise by 8.1% to  12.65 million tonnes.
 
That is the highest poultry meat production increase since the 1990s. It is also the highest output level since 2015's 13.56 million tonnes, which coincided with the banning of grandparent stock from America.
 
With poultry being substituted in place of pork, consumption is rising by 9.1%, from 11.7 million to 12.645 million tonnes. This is the largest percent increase in chicken meat consumption since 2007 and far ahead of the 2.7% increase initially projected for this year.
 
The big surprise is how 90% of this massive, near one million tonne increase in chicken meat consumption, is stimulating a far larger domestic supply increase than was possible a few years ago.
 
On one hand, Chinese broiler farms adjusted to the embargo on most US and European AA white feather grandparent stock by ramping up their use of forced molting to extend the reproductive lives of breedstock.
 
Previously grandparent AA broiler imports had fallen from 1.7 million head in 2014 to 630,000 head in 2015, when US grandparent stock was banned. After EU bird flu outbreaks caused grandparent stock from major suppliers such as France to be banned, imports totaled only 400,000 head in 2017.
  
In 2018 reliance on forced molting became less necessary. China liberalized its broiler trade with leading EU producer Poland and the supply of available New Zealand grandparent stock expanded. Over 900,000 grandparent AA white feather broiler stock were imported last year.
 
The doubling of AA white feather grandparent breeder imports dovetailed with increased production from a domestic joint venture between Shandong Yisheng Livestock Poultry Breeding and Hubbard Breeding Company, the latter a subsidiary of US-based Aviagen.
 
Both the domestic grandparent supply increase and rising breeder import volume were made possible by rising profitability: After the ASF outbreak native China breed chick prices stayed flat near RMB1.50/chick (US$0.22/chick) but AA white feather broiler chicks doubled in price, from just above RMB3.00/chick (US$0.45/chick) into the RMB6.00/chick (US$0.92/chick) to RMB7.50/chick (US$1.15/chick) range.
 
The USDA reports that "According to Boyar (a well-respected Chinese livestock analytics firm), in November 2018, the average day-old-chick price and white broiler meat price in major production areas reached 6.53 RMB per bird…the day-old-chick price from major breeding companies like Shandong Yisheng climbed to 7.3 RMB per bird, which is a nine-year high. As breeding costs have remained relatively stable, these high prices will deliver strong profit margins for the Chinese poultry breeding industry."
 
It forecasts that "These high prices will at least continue through the end of the 3rd quarter of 2019." Even so, as the attached graph shows, not all the increase in chicken meat supply is coming from inventory expansion.
 
Alongside an anticipated rise in inventories during 2019, the proportion of AA white feather broilers in Chinese broiler farms is rising for the first time in five years. This matters because they have a higher carcass meat yield. At the same time the USDA reports that to pay for the more expensive chicks, broiler farms have boosted grow out weights by 5%, into the 2.42kg to 2.50kg range. All this is making possible to meet most of that large 9.1% increase in 2019 chicken consumption from an 8.1% increase in chicken meat output.
 
At this time, China's chicken meat is 57% derived from AA white feather broilers, 28% from native China breed broilers (popular on festive occasions), 8% from rejected layers and 7% from hybrid birds. It will be a long time before 75% to 80% of meat comes from feed efficient and high carcass yielding AA white feather broilers (as it did prior to 2014). Even so, the momentum created by rising AA white feather grandparent supplies should continue well into 2020.
 
For now, however, China still finds itself bridging the gap between poultry supply and demand through imports. They are increasing by 20%, from 375,000 tonnes last year to a USDA estimated 450,000 tonnes this year. 85% of these imports or 383,000 tonnes will come from Brazil, which successfully resolved its 2018 chicken trade dispute with China. 40,000 tonnes or 9% will come from Argentina with another 13,500 tonnes or 3% each coming both Thailand and Chile respectively.

Brazil looks set to continue dominating imports: It agreed to an imposition of import tariffs of 17% to 32% on various white broiler meat products –but leading exporters JBS and BRF were given preferential treatment and exempted. Competition wise, Brazil's only major cost competition may come from Poland, which has just been given permission to resume exporting to China after bird flu got it banned in 2016.
 
Among two-tier importers, Thai chicken has only been allowed into China since April 2018 but already made significant inroads. Given the cozy business relationships between Thai integrators and Chinese importers, there is potential for Thai chicken imports to grow at the expense of rival tier 2 suppliers.
 
Volume-wise, China will run a roughly balanced chicken trade. 2019 imports of 455,000 tonnes marginally exceed imports but are only rising by 1.1% from the previous year's 450,000 tonnes.
 
Value-wise, China's poultry trade balance is solidly in the black: It imports commodity frozen chicken, with a high proportion accounted for by low-cost parts such as chicken feet, but exports mostly higher-value-added cooked or processed chicken.
 
China's biggest customers for cooked and processed meat are Japan (48%) and the EU (32%), which bought 216,000 tonnes and 144,000 tonnes respectively in 2018. EU exports account for this year's export increase, as China's EU import quota was raised by 5,000 tonnes.
 
In both these markets, its main competitor is Thai cooked and processed chicken, from which it faces increased competition. At this time, Chinese exporters are reportedly running losses to maintain market share in Japan, and possibly the EU, hoping the Thai baht will increase in value and make it possible for them to raise prices in the long run.
 
Going forward, it remains to be seen if this year is a real turning point or just another false glimmer of hope, several of which have appeared since 2012. There is no guarantee a serious bird flu epidemic won't break out again; that could tank the optimistic start outlined in this report. US-China trade negotiations could result in the resumption of mass US chicken imports and tip its poultry trade balance, as it dominated this market prior to 2010.
 
After rising as high as 11kg prior to 2012, per capita chicken meat consumption is recovering from its 7.5kg mid-decade bottom, reaching 8.4kg in 2018 and a projected 9.2kg this year. Production has an even longer way to go: Even if all growth momentum is maintained, it will be the early 2020s before China can finally exceed its 13.7 million tonne record chicken meat output of 2012. During the last seven years, Brazil overtook it as the world's second-largest chicken meat producer.
 
For now, the industry is enjoying high returns and having its supply surge met by a fortuitous coincidence of strong consumer demand and high prices. It is the first time in many years that China's poultry sector finds itself the financially healthiest of all its large protein lines. While it was projected to grow faster than any other major meat, it will take several more years of strong, consistent growth before the long-awaited promise of China's poultry industry is fulfilled.
 


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