Although the demand dynamics of China's vast agribusiness market have grown as expected, the feed-to-meat supply chain components appear to be developing in a different manner than was forecast. Contrary to predictions of requiring 10 to 15 million tonnes of corn yearly, with feed output unexpectedly flattening out, China is staying nominally self-sufficient in feed grains, but becoming a major importer of red meat.

 

This is because its meat demand did not evolve as was expected. On one hand, in gross aggregate terms, the country is eating almost as much meat as was aniticapted. When the USDA's Chinese meat consumption statistics are divided by its 2013 population of 1.35 billion, one get slightly over 60kg of meat consumption per capita, as was expected by this time. This consists of roughly 42kg per capita consumption of pork, 9.8kg of chicken, 6kg of beef 3kg to 5kg of meat from sheep, goat, rabbits or other land animals.

 

On the other hand, Chinese are eating far more red meat and a lot less poultry than was projected. At slightly under 10kg per person, China's chicken consumption is a third below that of developing countries like Thailand, which have comparable per capita incomes and lower overall meat consumption. Moreover, instead of expanding at the disappointing slow pace it did from 2000 to 2010, 2014 will see per capita chicken consumption fall back to 9.2kg.

 

Ten years ago, the consensus was that by 2014, Chinese would be eating at least 13kg of chicken. Instead of 2014's output falling 5% to 12.51 million tonnes, the extra 5.2 million of chicken production required to satisfy 13kg per capita consumption would have put China's 2014 chicken output at over 17.7 million tonnes, slightly more than what the US will produce this year.

 

That is partly due to the past three Hellish years, when supply-side crises ranging from KFC chicken's illegal antibiotic usage to successive bird flu epidemics assailed the industry. But there's also a demand-side disappointment to the poultry sector's disappointing performance: Even before these problems became an issue, eFeedLink, Rabobank and other commentators noted that not only had China's chicken consumption increased by a disappointing amount, but much of the increase was dependent on free or subsidized chicken-centered meals offered by institutions such as government offices, schools and the military.

 

But while poultry consumption remains relatively stagnant, rising personal incomes have boosted demand for red meat far more than was anticipated. That is unfortunate for China, as a country with its population density and limited arable land can produce broiler meat far more efficiently than beef or pork.

 

As a feed-inefficient, red meat animal, pork's output is constrained by China's feed grain policies and populist pork subsidies. The former keep's corn's domestic price artificially high in an effort to maintain domestic output and avoid excessive import dependence. The latter sees government sell-offs of frozen pork ruin hog farming profits in the run-up to major festivals and holidays, when they should be at their highest.

 

With government policies simultaneously boosting hog feed costs and slashing hog selling prices, poor returns have made China's pork production consistently trail consumer demand growth.

 

The situation got worse after 2007, when periodic government pork sell-offs were introduced alongside existing corn self-sufficiency policies. Since that time, China's pork imports have increased 1,391%, from 53,000 tonnes in 2006 to 790,000 tonnes this year.

 

But there was more at work than the Chinese swine market inability to surmount problems created by government intervention. Alongside pork supply problems, rising incomes has boosted the appetite for all kinds of expensive red meat, beef included. With no land to spare for rearing beef cattle, beef imports quadrupled from 9,000 tonnes in 2005 to 40,000 tonnes in 2010, then jumped another 1,338% in four years to an estimated 575,000 tonnes in 2014.

 

Curiously, even as incomes increased and poultry production fell, broiler imports are lower today than they were seven or eight years ago. This belies the fact that the simultaneous rise in red meat consumption and flattening out of chicken demand has as much to do with consumer choice as it does domestic supply issues.

 

Rising red meat imports did more than make China the world's second largest beef and pork importer after Japan; it also impacted China's feed and dairy sectors. First, with 60% of China's feed demand accounted for by swine, government price controls on corn and pork made it impossible for China's pork demand to be satisfied entirely with domestic production. The resulting lost millions of tonnes of pork output has no doubt impacted feed demand growth.

 

Second, with China's domestic beef prices rising sharply, many small scale dairy farms found it more profitable to sell off their cattle herds to beef abattoirs. In this way, China's domestic shortfall of red meat led to lower domestic milk production, much higher dairy imports and dairy price inflation over the last two years.

 

On one hand, constrained pork production and high red meat demand resulted in lower than expected demand for hogs and dairy cattle. All this coincided with the broiler sector's surprisingly poor demand growth and devastating bird flu epidemics. As a result, the unthinkable happened: China's feed output, which was expanding at a 4% to 6% pace in recent years, peaked in 2012, fell in 2013 and is staying flat in the manner of a mature, developed western country.

 

There is one positive effect to this trend: Five years ago, the industry consensus was that by 2015, China would need to import 10 to 15 million tonnes of corn. Instead, China imported 4.5 million tonnes in 2013, and is set to import 3.0 million tonnes this year.

 

It is very simple, China's relentless consumer demand growth demands a growing quantity of red meat every year; particularly pork, and more lately, beef. This meat can be supplied by raising animals inside China itself, which would force China to import more feed grain, but keep it self-sufficient in meat. Or it can import more meat, grow less livestock domestically. The latter option would cause feed demand to level off, thereby allowing domestic corn production to keep pace with feed demand.

 

The government's rigging of corn and swine markets encourages production of the former and discourages production of the latter. Years of slack chicken meat demand has now intersected with bird-flu driven inventory reductions and a selling off of dairy cattle for beef.  Along with the constricted pork output, this has resulted in a situation where, instead of skyrocketing corn imports, China finds its imports of red meat taking off instead.

 

Going forward, once the country's poultry sector fully recovers from bird flu, the pause in feed demand growth should give way to another long spell of continuous growth. But with more and more of China's red meat being sourced abroad, it would not be surprising if, in years to come, China makes less of a splash in the world corn and soy market, while pushing up the price of steak and pork chops.