March 22, 2017

Another hard stumble for China's beleaguered broiler sector

An eFeedLink Hot Topic
  • A food safety scandal and bird flu outbreak from five years ago has turned into a serious five year depression of China's poultry sector
  • Since peaking in 2012, output has fallen 20% to levels not seen in 2006
  • Instead of 16 millions and per capita consumption of 15kg, 2016 will see only 11 million tonnes and 8kg consumed per person
  • Substituting inferior domestic breeds in place of white feather breed stock is denting productivity
  • From balanced trade ten years ago, China is the second largest chicken meat importer after Mexico
2017 might be the Year of the Rooster but for China's broiler sector, the chickens just keep coming home to roost. For the fifth time since 2012, a hoped-for industry recovery from either food safety scandals or bird flu has been postponed.

For political reasons, the 2015 ban on US breed stock was not lifted even after the latter's bird flu epidemic subsided. With China traditionally relying on America to supply 90% or 1.5 million of its annual grandparent stock imports, it decimated China's inventory of white feather chickens, which made up 80% of broilers prior to this crisis.
To make matters worse, European avian flu outbreaks caused Beijing to subsequently ban French breed stock, eliminating a major alternative supplier from the industry's supply chain. Thus, imports of white feather breed stock fell from 1.7 million head in 2014 to 694,000 in 2015 (when the US breed stock ban was implemented) and 580,000 head in 2016, when French breeders became unavailable.
With both US and French breed stock unavailable now, white feather breed stock imports are falling to a USDA projected 500,000 head in 2017, making for a 71% drop over three years. With bans on US and French white feather breed stock making additional inventory declines inevitable, early 2017's troubles could not have struck at a worst time.
An H7N9 bird flu epidemic that struck in November intensified in the first quarter of this year, killing over a hundred people by late March and forcing the culling of over a hundred million broilers.  In response, broiler inventories fell approximately 8.5% over four months, from an eFeedLink estimated 1.31 billion head in November to 1.20 billion in March.
Initially, from 2015's 13.4 million tonnes, 2016 broiler meat output was expected to fall to 12.7 million tonnes but a bird flu outbreaks earlier that year dashed those hopes. –The resulting 12.4 million tonne production made for a whopping 8.2% output decline from the previous year.

A breed stock shortfall was expected to lead to another output decline in 2017. Even so, this most recent, persistent H7N9 epidemic had made matters much worse. The USDA was forced to revise its output estimate from 11.5 million tonnes to 11.0 million tonnes. This is a far cry from what was expected: Based on a 3.3% consensus estimate, China's broiler sector was expected to be producing at least 16 million tonnes of chicken meat annually by now, not 11 million.
–Indeed, if in 2012 anyone had predicted that after producing 13.7 million tonnes of chicken that year (and eating 13.5 million tonnes of it), China's chicken production would fall 19.7% or 2.7 million tonnes over the next five years, they would have been dismissed as crazy: Unfortunately, that EXACTLY is exactly Chinese poultry's situation in 2017.
Battered by food safety scandals and bird flu, consumption has also fallen back to 11.25 million tonnes. All this leaves China's chicken production and consumption at its lowest level since 2006, which was the last year when domestic chicken meat demand amounted to below 11 million tonnes.
Alongside the disappointing production totals, that makes for a demand side story to the world's biggest agribusiness disappointment: Instead of rising from 10kg in 2012 to near 15kg today, China's per capita chicken consumption has fallen back to 8kg.
This however, is down due to more than just consumer fears about bird flu or low production volumes. Over the short term, the need to control human bird flu outbreaks has forced the repeated temporary closure of wet markets. This in some cases has made it difficult for consumers to substitute yellow feather broiler meat in place of the reduced white feather broiler meat supplies at retail outlets.

Over the longer term, chicken meat never became came close to rivalling mass market consumption of red meat in the way that was expected. Unlike Americans, Chinese have clung to their strong bias in favor or red meat consumption. A surprisingly high percentage of China's chicken consumption occurs in fast food restaurants or institutional settings such as school or factory cafeterias.
With regards to the latter, the USDA reports that, "With the shuttering of so many factories, especially in Southern China, the [chicken] consumption at factory canteens has dropped, reducing overall white bird consumption."
Even so, with production falling even faster than consumption, China's poultry trade balance has tilted into the red. Traditionally a small net exporter or trade neutral, the last five years have seen a wide gap open in China's chicken meat volumes.
Because the USDA counts shipments to Hong Kong and Macau (which are Chinese territories) as 'exports', the latter are overstated. Similarly, not all USDA statistics count imports of chicken feet under poultry meat, which tends to understate imports.
When trade statistics are adjusted for the overcounting of exports and undercounting of chicken feet, we see China's terms of chicken trade in its real light: In 2012, before its crisis began, it exported 288,000 tonnes of chicken (excluding shipments to Hong Kong and Macau) and imported 473,000 tonnes (chicken feet included).
This year, it will only export 195,000 tonnes of chicken (excluding shipments to Hong Kong and Macau) while importing at least 730,000 tonnes. This forecast implies 28% more imported chicken than in 2016. Import volumes have risen at a 9% annual rate since 2012 and an 18% annual increase since 2014, after which breeding stock was banned.
For now, value terms of trade remain positive: 71% or 168,000 of last year's 237,000 tonnes of chicken exports (excluding Hong Kong and Macau) went to Japan, consisting of high value, cooked chicken.  This for now will give China a positive poultry meat trade balance from a value perspective.
Even so, until policymakers either get bird flu firmly under control, find a new grandparent stock supplier or develop the technical capacity to grow parent stock in-house, supply-side constraints will remain. Even when these obstacles are overcome, the cultural values that make chicken something you eat at while a poor student, eat in the factory canteen, at McDonalds --but don't serve as the main course during respectable dinners--will remain.

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