October 26, 2014
An inflection point for China's layer sector
With demand picking up and productivity increases tapering off, an era of low prices, high feed costs and sagging inventories are giving way to an era of renewed growth.
by Eric J. BROOKS
An eFeedLink Hot Topic
Has the corner finally turned for China's layer sector? While inventories of other livestock grew, layer numbers endured nearly seven years of long-term decline. According to eFeedLink's Livestock Tracker, from 815 million head in October 2007, layer numbers gradually downtrended, hitting a nadir of 680 million birds in June 2010.
A long declineWithin a year, on the back of record high pork prices, fast rising chicken costs and strong Chinese income growth, they made an impressive 16.9% inventory recovery back to 795 million birds by late 2011. Rising to RMB2.11/kg in August 2011, even layer chicks set a price record at this time.
The jubilation however, was short-lived. Farmers overestimated the number of layers required to meet market demand. Even as egg supplies became bloated, 2012's pork price deflation turned demand in the direction of red meat, causing a large downturn in egg consumption.
With supplies expanding and demand staying slack, fundamentals again turned against the egg market. Hence, after staying in the 790 million to 796 million range for the first half of 2012, layer numbers started falling steeply.
Thereafter, this decline was extended and made worse by a succession of H7N9 bird flu outbreaks in 2013. Although not directly impacted, the crisis coincided with the finding of dead diseased, pigs in Chinese rivers. This had the effect of depressing demand for all protein lines, eggs included -at a time of exceptionally fast rising feed costs. Caught between high feed costs and falling prices, layer producers went deep into the red.Layer numbers resumed their secular decline, falling nearly uninterrupted by 11.2% over 20 months, from 797 million in March 2012 to 708 million in December 2013. By that time, feed costs were starting to fall and the worst of China's catastrophic bird flu epidemics were winding down.
Downtrend winds down, but expansion is held back
Over the five proceeding years, several factors kept layer numbers down. Just like other livestock lines, layers faced high feed costs. Unlike other livestock lines however, China's demand for eggs was caught in a no man's land: On one hand, rapid increases in personal incomes were being used to boost meat consumption, whereas eggs suffered from a downmarket reputation -and the processed food sector was still too immature to become a sufficiently large customer to offset this trend.
While demand was slack at best, everything from the importation of more efficient breeds to the use of superior feed ingredients and better farm management boosted the productivity of layer hens. Even with its population growing, it became possible to meet China's demand for eggs with far fewer layers than would have been the case before.
This meant that for the longest time, China's egg prices did not keep pace with feed price inflation, and no matter how often inventories fell, supplies always threatened to overwhelm consumption. With demand growing more slowly than that of any other large protein line, China's large layer productivity increases created an almost perpetual oversupply situation. Nevertheless, in a slow, gradual way, the industry is turning a corner. From 708 million birds in December 2013, inventories made a partial, halting 5.3% recovery, to 745 million head by early October of this year. With no growth in layer numbers for the better part of a decade, by early 2014's Chinese New Year, China's population growth was finally starting to put a strain on supplies. As a result, this year was keynoted by a succession of broken egg price records –but neither the layer inventory nor egg supply expansion was as great as should have been anticipated.
Layer numbers started to recover, and after the usual, post Lunar New Year lull in demand kept doing so. Unfortunately, the previous year's bird flu outbreaks had left China with serious broiler shortages.
Even with egg prices repeatedly breaking their old records by 25% to 30% throughout 2014a sustained period of high broiler prices motivated layer farms to sell not just their oldest hens but even still productive, mature layers for profit.
Instead of making a strong, vertical rise, in the face of sustained, record high egg prices and the highest net profits in years, layer inventories flattened out, even falling marginally towards the end of the third quarter.
According to eFeedLink's October Livestock Tracker, "Although replenishment sagged, broiler prices were high, thereby sustaining a strong incentive to sell off older layers." Even when prices fell from their all-time records, costs dropped in tandem, leaving margins healthy -yet layer numbers still topped out, falling a marginal 0.16% in September.
Going forward, this situation will right itself both over the short-term and with regards to long-term fundamentals. First of all, the late summer sell-off of older hens was the last hurrah of this dying trend. According to eFeedLink's Livestock Tracker, "With chicken prices due to fall after [early] September's Mid-Autumn Festival, layer farms felt it was their last chance to capitalize on this year's strong broiler market."
Second, while demand and prices will fall in the cyclically slow period following the Mid-Autumn Festival, they will pick up again from late November through to late January, when both consumers and food processors stock up for February 19 2015's Lunar New Year.
Third, even if 2015's egg prices do not match their summer time records, this should be offset by China's post-harvest fall in feed costs that occurs around this time. On one hand, egg prices and layer returns should stay healthy. On the other hand, with broiler numbers fully recovered from bird flu, chicken prices are no position to re-visit their mid 2014 highs. Consequently, late 2014 and early 2015 should see a resumption of layer inventory growth seen in the second and early third quarter.
Going forward, after boosting layer efficiency strongly over the last five years, their rate of productivity increase is levelling out. At the same time, both in fast food restaurants and in processed food purchased for home use, Chinese consumption of processed food that utilize eggs, is now rising significantly faster than before.
Taken together, the resulting faster growth in egg demand and slow-down in layer productivity growth is changing the layer market's underlying fundamentals. They imply that beyond the first quarter's traditional post-Chinese New Year lull, China's layer population is poised to embark on its first period of sustained, long-term inventory growth since the turn of the century.
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