August 27, 2015
A lost decade for China's broiler sector
Once hailed as the country's most promising livestock line, it is being unseated by Brazil as the world's second largest poultry producer, and looks set to slump further.
By Eric J. BROOKS
An eFeedLink Hot Topic
After several years of successive food safety scandals and bird flu outbreaks that killed dozens of people, China's poultry sector's expansion is being held back by the country's recession. Moreover, a dreary half decade's cumulative damage is now showing up in official broiler statistics. Five lost years, outpaced by Brazil
Over the short term, for a third consecutive year, the USDA was forced to slash its projected Chinese broiler meat production and consumption estimates. Both this year's production and consumption estimates have been cut by approximately 0.6% from initial projections.
Having fallen for a third consecutive year, broiler meat production will total 13.025 million tonnes, virtually unchanged from last year's 13.00 million and down 5.4% or 700,000 tonnes from 2012's peak of 13.7 million tonnes.
At 12.789 million tonnes, consumption is also flat, down 0.3% from 2014 but 5.6% below its 2012 peak of 13.54 million tonnes. In fact, the only thing keeping both production and consumption from falling further is China's pork market, where record third quarter pork and piglet prices are boosting the consumption of cheaper white meats.
However, with numerous economic indicators implying that Chinese personal incomes and consumer demand are falling more steeply than initially anticipated, 2016's estimated 13.1 million tonnes of production and 12.87 million tonnes of consumption may yet be scaled back.
Neither does the industry's performance look any better from a longterm perspective. After rising 96% over 18 years, from 5.1kg in 1994 to 10.0kg in 2012, per capita chicken consumption has fallen back to 9kg .
-Sadly, long before bird flu broke out, integrators were caught using illegal antibiotics or meat processors exposed as re-using stale chicken parts, analysts expected China's per capita chicken consumption to be in the 14kg to 15kg range by this year. Hence, the industry's damage is mostly self-inflicted.
Nor does the country's broiler sector look any better when compared with its developing country rivals. For example, even though Brazil's per capita chicken consumption was three times higher than China's, its per capita chicken consumption over the same time jumped by 156%, from 18kg to 46kg.
In fact, despite having a population only 15% the size of China's, Brazil's broiler meat output, which equaled only 56% of China's production in 1994, will overtake it by 2016. Thus, a country with a sixth of China's population and whose economy has grown half as quickly will unseat it as the world's third largest poultry producer
Slack prices, low inventories, limited grandparent supplies
Alongside a dimming longterm forecast, this year's market conditions have also been against the industry. With wintertime bird flu haunting both the industry and consumers, disappointing prices and sales in early 2015's critical run up to Chinese New Year resulted in a large, second quarter culling of birds. since peaking at 1.4 billion in May, broiler fell a sharp 7% over three months to about 1.3 billion by late August.
Moreover, with China importing up to 95% of its breeding stock from the United States, January's ban of AA white feather broiler grandparent stock from that country is expected to constrain inventory growth. For according to USDA estimates, AA broilers account for 52% of chicken meat consumed. Native China breeds sold in wet markets make up another 32%, with other unique breeds supplying the remaining tenth. Should demand turn out unexpectedly strong, the shortfall would be most acutely felt by China's fast food sector, which is the biggest single customer for meat from AA white feather broilers. Although it is readjusting its grandparent stock sourcing towards EU, the breeding inventory shortfall could constrain chicken meat production well into 2016.
A weak recovery
The only bright spot was that this fall in broiler inventories coincided with a demand upturn in response to late June's Dragon Boat Festival, when consumption typically peaks. With fewer chickens available for slaughtering, preparations for September's mid-Autumn Festival and early October's National Holiday week coincided with high pork prices. The latter is motivating consumers to substitute poultry in place of red meat's rising cost.
As a result, once the cyclical, post Lunar New Year price slump bottomed out in the second quarter, the market recovered. Unfortunately, the price recovery was far weaker than it usually is under such circumstances. At first, from RMB6.89/kg (US$1.10/kg) in June, prices initially surged 18% to an average of RMB8.14/kg (US$1.27/kg) in July. [Note: because of China's recent currency devaluation, US dollar prices did not rise by an equivalent amount].
Despite the impressive rebound, even with Mid-Autumn Festival preparations underway amid constrained broiler supplies, August saw this rally fizzle out. This occurred even though prices were some 20% below their level in the same month of 2014.
Consequently, while this mid-year price rally moved integrator margins from an eFeedLink estimated -RMB0.93/kg (-US$0.15/kg) net loss in June to a modest RMB0.70/kg (US$0.11/kg) July profit, the scope for higher returns and industry expansion is at best limited.
Going forward, the autumn harvest's lower feed costs will be counterweighted by slightly lower broiler prices: Not only are margins thin, but with the ban on US grandparent stock still in effect, even if prices and profits become more favourable, it will be difficult to boost inventories and chicken meat production in a manner that could take advantage of the situation.
Bad reasons for a good trade balance
At the same time, there have been shifts in China's broiler trade. Citing its bird flu outbreaks, the country banned US chicken meat imports in January. This however, was if anything, the culmination of a longstanding downtrend. Eight years ago, the United States supplied over two-thirds of China's broiler meat imports. However, a succession of trade bans since 2009 had made it an inconsequential supplier. From a 21% of chicken imports in 2014, America's share of China's chicken import market is not expected to exceed 5% in 2015.
With Brazilian chicken being substituted in place of banned American supplies, its share of Chinese poultry meat imports jumped from 66% in 2014 to 75% in 2015. As part of its drive to import more South American feed and livestock products, Argentina's share of chicken imports also rose from 7% to 10%. Chilean chicken exports expanded the most quickly of all, going from 1% to 5%.
Even so, with China's demand for chicken staying slack and the government trying to avoid an excessive inventory build ups, the actual amount of Latin American chicken exported to China rose by less than these percentages imply. With the gathering recession cutting meat consumption below earlier expectations, the USDA's initial 215,000 tonne import forecast for 2015 was cut back to 210,000 tonnes. That is 19.2% less than 2014's 260,000 tonnes. From a longer term perspective, it is down some 55% from the 400,000 to 480,000 tonnes of chicken imported from 2007 to 2009, before a succession of crises dented its longterm growth in poultry consumption.
The export picture is somewhat brighter, with the 450,000 tonnes now expected beating initial forecasts of 430,000 tonnes. But aside from Russia's substitution of Chinese breast in place of banned western supplies, its growing chicken trade surplus betrays a darker truth: For six consecutive years since 2009, production has exceeded consumption. With a nasty recession on the horizon, even amid constrained inventories, 2016 will probably see the country unable to consume all the chicken it produces for a seventh consecutive year.
America has shown that it is possible for a large poultry grower's domestic market to survive bird flu unscathed. Everything from food safety scandals to low consumer uptake points back to an industry that mismanaged its golden opportunities.
The good news is that with this decade being so disappointing, China's broiler sector has at least five to ten years of unexpectedly strong growth ahead of it -but first, it must get its act together.
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