December 5, 2014
Performing below expectations: China's faltering broiler sector faces a third flat year
Once the country's most promising meat line, scandals and disease have brought poultry's production and consumption growth to a standstill.
by Eric J. BROOKS
An eFeedLink Hot Topic
In a country where feed and meat consumption have charged forward like a locomotive, China's third consecutive year of flat or falling broiler consumption and output is unprecedented. The country's 1.35 billion population is always rising but this year's chicken meat output is almost as it was in 2010. 10 prosperous years, followed by Hell
The previous decade was Chinese poultry's golden era: From 2002 to 2012, broiler meat output rose 47.7%, from 9.278 million tonnes, peaking at 13.7 million tonnes. Thereafter, one disaster after another struck broiler farms.
Late 2012 saw the exposure of excessive, dangerous antibiotics and anti-viral drug use in the Liuhe Group broilers, which supplied the country's KFC restaurants. Aside from wrecking the Chinese KFC subsidiary's bottom line, the resulting drop in consumption was followed by a spate of lethal bird flu outbreaks. Along with destroying over a quarter of the country's chicken population in just two months, H7N9 also infected over 450 people, caused over 150 deaths, and persists to this day.
In mid-2014, the bird flu situation was only starting to fade from public consciousness when China's state-run media exposed that leading, US-based integrator OSI was relabeling expired chicken meat with new dates and even recycling discarded broiler parts from its factory floor into products like McNuggets.
As a major supplier to fast food chains including McDonalds and Starbucks, OSI's use of stale, rejected chicken meat was only the latest in a series of devastating, poultry-related food safety scares to reach the public. It was followed by new H7N9 bird flu outbreaks this December and the first round of human avian flu infections since March 2013.
Coinciding with an economic slowdown, per capita consumption has fallen 9.6% from about 10.4kg in 2012 to approximately 9.4kg in 2015. Demographically speaking, it is very strange for a developing country with a low but rapidly rising personal incomes to see such a fall in the consumption of any meat line, let alone chicken. It is also very far below expectations -ten years ago, some analysts were expecting China's per capita chicken consumption to be around 15kg by this time.
Its public image problems aside, for a large, fast growing market with healthy income growth, China's chicken output has also been oddly stagnant. Since peaking at a USDA estimated 13.7 million tonnes in 2012, production fell 2.6% to 13.35 million tonnes in 2013, followed by another 2.6% drop, to and 13.0 million tonnes in 2014. For 2015, output was expected to remain flat at 13.0 million tonnes, 5.1% below its 2012 peak -even though China's economy and population will have grown by 22% and 3.1% since that time!
As surprisingly downbeat as these statistics sound, with bird flu infections of both chickens and people rearing its head at the start of 2015, it is possible that output may yet fall below the 13.0 million tonnes projected for next year.
All these problems have also impacted China's broiler inventory growth, which can be best described as a being statistically flat in an unstable, strongly undulating way. According to eFeedLink's privately compiled statistics, after hitting 1.2 billion in early 2008, the financial crisis induced recession caused broilers to fall and bottom out and stay in the 1.02 to 1.06 billion head range through mid-2010, when the recovering economy boosted chicken demand.
2011's record high pork prices and a booming economic recovery greatly stimulated broiler demand, such that they equaled their 2008 high of 1.2 billion head by May 2012. In fact, even though 2012's average inventory volume was only 9% higher, 15.7% more broiler meat was produced.
This indicates that from 2008 to 2012, the quantity of meat harvested from every mature, slaughtered broiler increased at an approximate rate of 1.5% annually. -The efficiencies mostly came from better feed and new, imported broiler breeds brought to higher finishing weights in a shorter time, as this is the most consolidated and integrated of major Chinese protein lines.
2012 was also the last good year for this industry: Numbers fluctuated between 1.25 and 1.30 billion, amid prices that stayed ahead of feed costs. Consumption jumped 4% as that year's record high pork prices encouraged the substitution of cheaper poultry in its place. The industry entered 2013 with inventories stable but with late 2012's Liuhe-KFC scandal decimating prices, farms suffered very poor returns in the early year run up to 2013's Chinese New Year, when profit margins should have peaked.
Just as that scandal was fading from public memory, H7N9 started killing off both birds and alarming number of people who frequented wet markets. Prices plunged, putting producers in a deep loss position. With birds being culled for public safety reasons, inventories fell 25% from March to May 2013, bottoming out at 0.93 billion birds. As the breed sold in wet markets where much of the poultry-to-human transmission of bird flu occurred, pricey, slower growing (but tastier) China breed broilers were impacted worse of all. Whereas AA broiler prices fell 19% from March to May 2013, China breed broilers dropped in price 30%. With the wet markets were most native Chinese broilers are sold temporarily closed, their consumption fell by even more.
Once mid 2013's warmer weather brought the first H7N9 outbreak to an end, the resulting chicken shortage and record high prices that followed brought inventories back to 1.27 billion by the close of 2013. The combination of mid-year inventory shortfall and bird flu brought about a decline in both production and consumption. It was only the second significant drop in yearly broiler meat production since 1987.
It was hoped the industry would finally recover in 2014 but the past year brought about yet another set of frustrations. First, while feed costs have fallen by up to 50% in most countries, in China's government controlled, import restricted market, corn is only 7 less expensive than it was 2 years ago -and costs US$9.70/bushel at a time when CBOT corn is going for under US$4.00/bushel.
Even this price decline mostly came in the second half of 2014, too late to positively impact the past year's production. However, even with pork prices were at their lowest levels since the late 2000s recession, encouraging its consumption in place of poultry, broiler consumption fell from the previous level.
With swine prices staying low, the USDA forecasts that 13.0 million tonnes of chicken meat output will outpace 12.79 million tonnes of domestic consumption -itself 5.5% lower than the 13.55 million tonnes consumed in 2012, and barely higher than the 12.5 million tonnes consumed in 2010.
--But at the time of publication, all indications are that production and consumption may come even below these relatively low expectations. H7N9 bird flu again hit China's broiler and layer population in late 2014 and early December brought reports of new cases of human bird flu in southern China's Guangdong province, which has higher chicken consumption than most of the rest of the country.
Bright, but limited trade picture
In fact, the only good news for China's broiler sector appears to be on the international trade front. Like many Asian countries, China's dark meat happy consumers create shortages of bonier parts and surpluses of breast meat. Both factors are now going China's way.With domestic consumption sagging, imports of parts have fallen from 438,000 tonnes in 2008 to 240,000 tonnes in 2014 and a USDA estimated 235,000 tonnes in 2015.
On the other hand, ever since Japan's tsunami and nuclear accident, Japan's exports of broiler meat to China skyrocketed. By the time Thai chicken was allowed back into China after being banned by bird flu for eight years, China's suppliers had already built up strong, long-term relationships with Japanese importers. For 2015, Japan's 243,000 tonnes of Chinese chicken imports will account for 53% of China's estimated 460,000 tonnes of exports.
A similar success story is happening in Southeast Asia, where ethnic Chinese owned Malaysian fast food and processed food companies are importing an increasing proportion of their supplies from China. In fact, even if one does not count exports to Hong Kong (which is technically part of China), net exports of 335,800 tonnes easily outweigh imports.
But this trade surplus is more about the failure of China's market to develop than it is about the competitiveness of its chicken overseas. For most of the past 20 years, China's broiler consumption equaled or exceeded its output. Since the start of the current decade however, consumption has consistently fallen short of production, which is not a good position for such an industry with such a large national market to be in –especially since trade accounts for less than 4% of a 1.36 billion population's market.
After going from net exporter to near balanced trade, falling domestic consumption is freeing up much chicken, particularly white meat, for export. With Russia seeking new suppliers after banning meat imports from the west in wake of the Ukrainian conflict, apolitical, chicken breast, abundant China looks to be an ideal supplier. As imports of chicken from the US disappear, Russia is anxious to replace them with supplies from neighbouring China. The two countries are already discussing the allowing in of Chinese chicken into Russia.
Hence, while China was once forecasted to become either a net chicken importer or have balanced trade, with per capita consumption nearly a third below what was projected at this time, imports are far below expectations.
Hence, it would be far better for China -and its domestic broiler sector, if domestic demand caused this trade surplus to disappear and the industry started developing to the size and scope that was initially projected. One things is for sure: When China finally does get bird flu and food safety scandals under control, the poultry sector will finally rebound with several years of rapid expansion based on pent-up demand.
For now however, China's broiler sector looks like it is in the same five year slump that dogged its promising dairy sector after the melamine contamination scandal. It took seven years before China produced as much fluid milk as it did in 2008. Will it take fewer years for China's scandal dogged broiler sector to recover from the troubles that commenced in 2012?
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