December 1, 2017
China's broiler sector: Minimizing the downtrend amid a Latin American windfall
Molting, layer culling and China breed broilers all play a role in sustaining production. As supply falls faster than demand, Brazil is the main beneficiary.
By Eric J. Brooks
A eFeedLink Hot Topic
China's bird-flu besieged broiler sector remains in what amounts to a well-managed decline. With more human bird flu cases and deaths over the past year than in the previous five years of outbreaks combined, things could have turned out worse. Over 700 people were infected with H7N9 bird flu in 2017 -more than all previous year combined- and the disease has a 40% mortality rate.
While H7N9's losses and forced massed poultry culling have caused inventories to fall by 25% on several occasions since 2013 (before recovering quickly), the problems have impacted demand as much as they did supply.
Bird flu deaths and the publicity of wet market closures to control the disease have done much damage to China's chicken per capita chicken consumption. In the mid-2000s, per capita chicken consumption which was expected to reach 15kg by the mid-2010s. Instead, based on USDA figures, it fell from 9.8kg in 2013 to 8.4kg in 2017 and a projected 8.0kg in 2018.
Output has fallen even faster than consumption but held up better than expected. Broiler meat production did not fall an initially USDA estimated 10.3% from 12.3 million tonnes in 2016 to 11.0 million tonnes in 2017. Instead, output declined for the fifth time in six years but a still steep 5.7%, to 11.6 million tonnes.
Nor is 2018 expected to be any better: Another 5.2% output decline to 11.0 million tonnes is expected. 2017's output will be 15.7% below is 2012 peak and is on track to be nearly 20% below its peak level by the end of 2018. At this point, the third largest chicken producer's woes are also having a global impact: It is mostly due to China's declining poultry production that world chicken meat output will expand by 0% to 1% for the third consecutive year rather than its previous 2% to 3% rate.
Its once-vibrant broiler sector is caught in a vicious, three-way supply and demand trap. Production is badly constrained by an escalating rate of both poultry and human bird flu outbreaks, with the latter resulting in an alarming number of fatalities.
At the same time, China heavily relies on imported grandparent stock to maintain broiler production. Unfortunately, to avoid making a bad avian influenza situation worse, Beijing initially banned the import of replenishment breedstock from America, which formerly supplied 90% of grandparent breedstock. After banning US breedstock in 2014, the spread of bird flu to countries such as France, Spain, Britain and Poland forced it to reduce imports from these traditional alternative breeder chicken suppliers.
One reason for this is that unlike most of the world, China does not follow OIE guidelines: Instead of banning the imports of grandparent stock from specific provinces or regions where an outbreak occurs, Beijing bans them from the entire country. Canada and New Zealand are now the only major suppliers able to meet China's strict grandparent stock import criteria. As a result, China's broiler breeder imports have fallen by 72% over three consecutive years, from a peak of 1.7 million in 2014 to 480,000 birds in 2017.
With productive grandparent broiler inventories in steep decline for several consecutive years, China has resorted to several methods to sustain chicken meat production. First, China has been more successful-than-expected in using forced molting (with some help from hormonal supplementation). This has extended the productive life of breeder birds and helped to mitigate an ongoing decline in AA broiler inventories, which have dwindled over the past four years.
Second, at times when bird flu hasn't been wreaking havoc on the industry, growers have grown their birds to higher finishing weights. Third, along with the feeding of to higher finishing weights yellow feather native breed broilers (which do not need grandparent stock imports) have been increasingly substituted in place of their more productive AA white feather counterparts.
Alongside forced molting, the substitution of native Chinese broilers in place of AA white feather broilers is one reason why, despite the acute 72% drop in grandparent stock imports, China's total broiler inventory fell by approximately 16%: From an eFeedLink estimated 1.45 billion head in mid-2016, bird flu losses brought inventories down to 1.22 billion head in Q1 2017. They have since partially rebounded and are expected to close the year near 1.31 billion head.
Consequently, the proportion of chicken meat accounted for by AA white feather broilers fell from its usual 80% to 85% share to a USDA estimated 53% in 2017 and less than 50% in 2018 -but all this has come at a price: Yellow feather China breed broilers have average feed conversion ratios of 2.5, compared to a 1.6 to 1.7 for their AA white feather counterparts.
China breed broilers take 70 to 90 days to reach 1.7k to 1.9kg, compared to the 40 days required for their AA rivals to reach 2.2kg to 2.6kg. The industry's growing dependence on lower productivity China breed chickens is one reason why over the past four years, chicken meat production has fallen by more than broiler inventories.
Finally, with chicken meat offering better returns than eggs, a mass culling of layers has also played a part in sustaining chicken meat production. According to eFeedLink's monthly Livestock Tracker, China's layer population has fallen from a near constant 790 to 800 million head from early 2016 to May 2017, China's layer population fell to an estimated 760 million head by December 2017. Without H2 2017's mass layer culling, broiler meat production would have come in around 11.3 million tonnes rather than the 11.6 million currently being projected.
While all this has caused production problems to fall faster than consumption, the latter is held back by more than bird flu fears. Even before the industry's crisis, chicken's status as a poor man's food made consumers far more resistant to eating more chicken than their western counterparts. At 8kg, China's 2018 chicken consumption is barely higher than the 7.5 consumed in 2000.
-In retrospect, many analysts misread red meat's status symbol importance and thought chicken consumption would make more gains at the expense of beef and pork. Instead, since 2000, consumers nearly doubled their per capita beef consumption (from 4kg to 7kg) and pushed up their pork consumption. The meat consumption gains that they thought chicken would make instead went into higher beef and pork consumption.
Indeed, much chicken consumption was 'forced' but this is increasingly not the case. Chicken remains the meal of choice at the subsidized school, government, factory and construction employee cafeterias -but even t his is changing. According to a recent USDA report, "Large companies had onsite company cafeterias that were major consumers of white-bird poultry. As these companies relocate, these cafeterias are closed down. It added that "As construction slows, the large cafeterias that cater to these construction sites no longer need such large supplies of low-cost, white-bird poultry."
While chicken consumption in the fast food and ready-to-eat meals sectors has picked up, "This trend has not fully offset the factors mentioned above." This means that by the year 2020, China's chicken consumption will be literally a third lower than what they confidently expected it to be by that time. It is the reason why instead of overtaking America as the largest poultry meat producer, China has fallen behind Brazil into third place.
Finally, if all these woes weren't enough, China's new, stringent enforcement of environmental laws is forcing many, smaller, undercapitalized producers to shut down their operations over the next year. While this will not impact the industry over the long-term, it too will hold back chicken meat production in 2018.
With China's chicken production slipping even faster than its consumption, no nation has benefitted more than Brazil, which is the world's second-largest producer and greatest poultry exporter. 2017's unexpectedly high production kept imports at a still record 500,000 tonnes but lower than the 600,000 tonnes initially expected.
A decade ago America supplied 80% of China's broiler meat imports. Brazil today supplied 83% of H1 2017's imported chicken, with Argentina (12%), Chile (4%) and Poland (1%) supplying lessor shares. With no solution in sight to Chinese poultry's production woes, Brazil is on track to supply well over 400,000 of 2018's 500,000 tonnes of imports. With 80% of China's 400,000 tonnes of broiler exports going to Hong Kong (which is technically part of China), it is a much bigger poultry importer than it appears to be.
Going forward, Chinese poultry's production, consumption, and trade forecast are equally uncertain. Late 2016 saw Shandong Yisheng sign US10 million dollar US$10, three-year contract with the French genetics firm Hubbard to import great-grandparent stock. The imports were delayed when France got impacted by bird flu and had its birds banned. Even so, Hubbard began importing grandparent stock from nations such as Canada and New Zealand that were not affected by China's bans. Even so, at 500,000 head, 2018's grandparent stock imports remain two-thirds below normal levels. China could solve the problem tomorrow by liberalizing grandparent stock imports, but there's no indication it will do so at this time.
Consumption-wise much depends on whether this winter will see a repeat of last year's record bird flu outbreak. So long as the situation remains under control, consumption should gradually recover. -Even so, without a sustained supply-side recovery, Latin America will be the main beneficiary of any rise in Chinese poultry meat consumption.
All rights reserved. No part of the report may be reproduced without permission from eFeedLink.