February 26, 2016

Hard times for China's broiler sector

An eFeedLink Hot Topic
  • Even with constrained breeder stocks, consumption is falling by more than supplies 
  • At 12.7 million tonnes, this is the lowest quantity of chicken meat produced since output peaked in 2012 and the smallest amount since 2010 
  • Production constraints coincided with import liberalization, making China a net chicken importer for the first time since the start of the decade
Instead of 13.0 million tonnes originally forecasted, 2015's chicken meat production amounted to 13.4 million tonnes. On one hand, this is 3.1% increase over 2014's 13.0 million tonnes and exceeds the 13.03 million tonnes initially forecasted. On the other hand, despite expectations that poultry demand would rise by 4% annually, chicken output remains substantially below its 13.7 million tonne peak set in 2012.
Going forward, 2016 portends to be another year of flat, declining year for the poultry meat sector. On the supply side, America's bird flu outbreaks made China ban live bird imports from the US, its main provider of grandparent stock for white feather broilers, which make up 85% of its chicken meat market. It later responded to French bird flu outbreaks by banning imports from that country too.
With only New Zealand and a handful of other smaller poultry exporters to supply grandparent stock, it has become difficult for China's poultry sector to replenish its flocks of white feather broilers. With white feather broilers accounting for over 80% of chicken output, a drop in broiler inventories and chicken meat production cannot be avoided. According to eFeedLink's statistics, after China banned US grandparent stock in early 2015, China's broiler inventories fell 7.4% in eight months, from 1.400 billion head in May 2015 to 1.297 billion this January.
Although inventories of traditional, yellow feather Chinese broilers continue to rise, they cannot offset a USDA estimated 10% fall in white feather broiler numbers forecasted for this year.
With traditional Chinese breeds now comprising a larger proportion of output than they have in years, overall chicken production is compromised in another way: Traditional chicken breeds have feed conversion ratios of 2.5, versus 1.8 for white feather broilers. They also take 20 to 30 days additional days to reach maturity and have lower finishing weights.
As a result, 2016 chicken output is falling a steep 5.2%, to 12.7 million tonnes. Furthermore, these supply-side issues are coinciding with a raft of demand constraining factors. Moreover, while recessionary economic conditions are constraining meat consumption, demand is also held back by changes unique to China's chicken market.
Relative to pork, Chinese culture perceives chicken to be a socially less prestigious down market meat line. Moreover, frozen, white feather broiler meat is considered very tasteless compared to chicken meat obtained from yellow feather broilers slaughtered on site at wet markets. Aware of its poor reputation, many supermarkets limit the shelf space devoted to frozen, white feather broiler chicken meat.
With relatively little chicken meat consumed at home or during holiday festivities, its mass consumption was always supported by large institutions, which feed their soldiers, employees or students at a low cost. Now, the USDA reports that, "The changing manufacturing structure in China, with more factories closing as the result of moving production to lower cost countries, has reduced the number of factory canteens where white feather broiler meat was once widely consumed by workers because of its low cost."
But chicken meat from traditional Chinese breeds is also having marketing problems of its own. Wet markets where the birds are sold get closed down for indefinite periods of time whenever bird flu strikes, particularly during the high-consumption months prior to Chinese New Year. Over the longer term, consumption of yellow feather broiler meat is falling victim to, "The government's desire to end live bird slaughtering in wet markets as part of its efforts to enhance food safety and prevent avian influenza from spreading to humans."
Finally, all these constraints on the production and consumption of domestically produced chicken coincided with China opening up its market to mass imports of lower cost Brazilian broiler meat. With output falling faster than consumption, chicken meat imports are expected to rise 48.2%, from 270,000 tonnes in 2015 to a USDA estimated 400,000 tonnes this year. However, with Brazil's real falling in value by far more than China's own currency, the falling cost of foreign chicken meat means that this import forecast may be exceeded.
While chicken import volumes are rising, production constraints in China are occurring alongside a growing surplus of low cost Thai and Brazilian chicken available to European and Japanese importers. As a result, 2015 chicken exports of 400,000 tonnes were down 7% or 30,000 tonnes from their 2014 level. For 2016, exports are destined to fall another 5%, to 380,000 tonnes. All this means that China, which has had a 200,000+ tonne trade surplus in chicken for most of this decade, is becoming a net chicken meat importer for the first time since 2010.

Finally, with demand wilting under the weight of manufacturing sector job layoffs, even the pre-Chinese New Year bull market, when a large share of yearly profits are made, failed to materialize. In January, two to six weeks before Lunar New Year, even with 4.3% fewer broilers released to market than a year earlier, demand fell by more than the quantity of chicken meat supplies. As a result, live broiler prices were 11.7% lower than they were in January 2016.
With prices lower, it is not surprising that profits are also suffering. According to eFeedLink's Livestock Tracker, January saw white feather broiler integrators run a RMB16/kg (US$0.03/kg). Only the yellow feather broiler sector, which accounts for no more than a fifth of poultry production, made a relatively thin profit margin of RMB1.60/kg (US$0.25/kg).
But all these medium term issues lead up to a deeper, more serious longterm issue: What happened to China's most promising meat line? Analysts expected chicken production to rise by 3% to 5% annually and greatly outpace the consumption of red meat.
Instead, according to USDA statistics, from 2012 to 2016, China's pork consumption (which is at 41kg per capita), will have risen 6.1% and beef consumption by 11.5%. Chicken consumption, by comparison, has fallen by 6.2% over this same time period. While recession, animal diseases and food safety scandals all played a role, the country's red meat lines were far more successful at transcending these same challenges.  It is time for everyone from China's agribusiness analysts to government policymakers to take a long, hard look at what was supposed to be the world's most promising poultry sector.

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