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COMMENTARY & ANALYSIS

April 23, 2018

 

China's broiler sector: Bottomed out, but with no turnaround in sight

 

Bird flu is under control but without a resumption of AA grandparent imports and restructuring of broiler population genetics, profits, production and productivity will remain far below their potential.

 

By Eric J. Brooks

 

An eFeedLink Hot Topic

  
         
While the worst might be over for China's broiler sector, it's still far away from anything resembling solid, sustained growth.  Beset first by a succession of food safety scandals and later by intractable avian influenza epidemics (with human fatalities), the worst ever outbreak occurred in H1 2017.

 

Fortunately, after a vigorous redesigned vaccination program, both bird flu and human cases of the disease have finally fallen to unexpectedly low levels. Hence, the country may finally get its poultry disease situation under control. Even so, from both a supply side and demand growth perspective, the industry remains more in a state of ruins than in recovery.
 


Supply-wise, production problems created by years of massive bird flu were made worse by a wide ban on imports AA broiler white feather broiler grandparent stock. Before 2014, China's eFeedLink estimated 2 billion broiler inventory consisted of 80 to 85% AA white feather broilers and 15% to 20% slower growing China breed broilers, which are popular in traditional meals and during public holidays. AA broilers, by comparison, made up most of the chicken meat found in mainstream supermarkets, fast food restaurants, processed food and pre-cooked meals.

 

America's traditionally supplied over 75% of the AA grandparent stock used to maintain the national AA broiler inventory. When bird flu hit America in 2014, China promptly banned all grandparent poultry imports from the country.

 

Though it boosted its grandparent stock imports from other countries, they collectively could not supply anywhere near the 1.3 million birds America did. The situation was made worse when the spreading of bird flu to European nations made China ban grandparent stock imports from France and Spain. Though the American, French and Spanish bird flu outbreaks are now well under control, Beijing shows no sign of allowing the re-entry of AA broiler grandparent stock from these nations or America back into China.

 

With only New Zealand, Poland and Canada able to supply grandparent stock, their import volume has declined from 1.7 million head in 2014 to 440,000 in 2018 and a USDA estimated 400,000 this year. The national AA broiler flock's inability to sustain itself has forced a mass substitution of China breed broilers in their place, such that the latter now make up over half of China's broiler inventory.

 

This forced substitution of China breed broilers in place of AA chickens has serious productivity consequences. AA broilers mature to a slaughter weight of 2.0kg to 2.2kg in 40 days, less than half the 90 days required by traditional breeds to achieve weights of 1.5kg to 1.9kg.

 

The cost inflation of slower maturity time and lower finishing weights is then made worse by the fact that with a feed conversion ratio of 2.5 (versus 1.75 for AA breeds), domestic chicken breeds require 50% more feed to grow the same amount of protein. The net result of all this? China's broiler meat output will be 17.6% lower in 2018 than it was in 2014, before AA broiler import bans were imposed –but there are several hundred million more birds producing this smaller quantity of chicken meat.


Over the short term however, the cessation of massive inventory losses to bird flu and recovery in consumer confidence has stabilized supply and demand. Instead of falling from 11.6 million tonnes to 11.0 million tonnes, broiler meat output is now projected to rise a USDA estimated 1% to 11.7 million tonnes. With fears of catching bird flu from chickens also waning, consumption is also rebounding: Instead of falling from 11.495 million to 11.095 million tonnes as the USDA projected in late 2017 it will  stay nominally flat, with 2018's 11.535 million tonnes of domestic demand up 0.1% over 2017. Even so, it means per capita consumption will fall from 7.9kg in 2017 to 7.6kg this year. That's 24% below the 10kg consumed in 2012 –and far below the 15kg to 18kg of per capita chicken consumption mainstream analyst once projected for China by 2020.

 

On one hand, the 2018 chicken meat production forecast is a profoundly significant 6.4% more than what was expected only five months ago. On the other hand, that puts 2018 chicken meat output and consumption nearly 15% below the 13.7 million of production and 13.543 million tonnes of consumption tonnes achieved in 2012, when the industry's troubles began.

 

The trade picture has also been impacted: Since 2010, exports have stayed flat in the 380,000 to the 430,000-tonne range, declining 3.75% in 2018, to a USDA estimated 385,000 tonnes. Partly because production fell faster than consumption, in part due to food safety scandals and bird flu fears, imports have doubled from 254,000 tonnes in 2012 to 500,000 tonnes this year, with an estimated additional 100,000 tonnes smuggled in from Hong Kong.

 

The source of imports has greatly changed. Until the late 2000s, America supplied up to 80% of poultry meat imports, which at that time mostly consisted of chicken feet. Brazil only supplied about 10%, with other countries providing another 10% of imports.

 

After America put import barriers on Chinese tires in 2009, Beijing retaliated with import duties against US chicken. As a result, the US proportion of Chinese poultry meat imports dropped to 7% by 2015 and nothing for the last two years. Brazil now supplies 80% of 85% of annual chicken meat imports with neighboring Argentina and several other countries supplying the rest. With the US now engaged in a trade war with China, it's unlikely that US chicken will show up on Chinese dinner plates anytime soon.

 

Ultimately however, imports only account for 5% of China's broiler consumption. What really matters is that while the malaise in China's broiler sector has stopped getting worse, there's very little to improve the situation at this time. Having brought bird flu under control less than a year ago, there is still very little confidence that it won't break out again, especially since previous vaccination programs looked promising at first, only to watch new epidemics break out.

 

More importantly, to boost productivity, push out imports and improve industry profit margins, Beijing needs to allow a resumption of grandparent stock imports from enough countries so that they will total 1.8 to 2.0 million head annually. The mere substitution of several hundred million AA broilers in place of native breeds could –within months– boost domestic chicken meat production by over a million tonnes a year while lowering unit costs and boosting profit margins.

 

The following should be concluded: While Beijing loses nothing by substituting European or South American beef or pork in place of US supplies, this is not the case with AA grandparent broiler stock: It needs to swallow its pride and allow a resumption of AA grandparent breedstock broilers from France, Spain and America too. The sooner it does, the faster things will improve for China's broiler sector.

 


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