September 2, 2016
China's underrated egg laying dominance
By ERIC J. BROOKS
An eFeedLink Hot Topic
- While China's 50% share of the world swine sector is well known, few are aware that it produces 40% of the world's eggs
- Due to productivity gains from consolidation, layer genetics, better feed, scale economies, in 2015, it produced 33% more eggs with 25% fewer chickens than it did in 2000
- Despite having only 25% of Japanese and Korean income levels, Chinese eat the same number of eggs per capita
- Already consolidated, layer farm scale to continues to increase; output is even more concentrated in value-added niches
- Five years of consecutive crises decelerated output growth to half its former level and halted productivity gains
- Due to slower consumption growth, ongoing consolidation and rising productivity, the next decade will see output rise up to 2% annually with flat or falling layer inventories
When it comes to Chinese agribusiness dominance, people usually think of how owns half the world's hogs. However, its weight in the world egg market is almost as great. According to UN FAO statistics, China accounts for over 60% of Asian egg production and 40% of global production (35% of if eggs by ducks and other non-layers are excluded). This is considerably higher than its 18% share back in 1990, let alone its 19% share of the world population. From 5.35 million tonnes of eggs in 1985 (when it surpassed America to lead the world), Chinese layers will produce an estimated 30 million tonnes this year.
On one hand, China's share of the world egg market peaked at around 43% a decade ago. With Asian nations like India, Pakistan and Indonesia growing several times faster, its share of the world market will gradually stabilize near 33%.
On the other hand, America, the next largest producer, produces less than 6 million tonnes of eggs, which is barely 20% of China's production volume. India, the next largest Asian producer, produces less than 5 million tonnes of eggs and accounts for no more than 6% of world production.
Moreover, whereas Indian eat on average 2.4kg of eggs annually, China's per capita egg consumption has skyrocketed from 5kg in 1985 to 21kg this year. Such high consumption levels naturally mean that the sector's growth rate has decelerated. Based on FAO and Chinese government statistics, output grew an average of 5.8% annually from 1985 through 2015, but decelerated into a 2.3% pace in the 2000s, and only 1.3% during the last five, more troubled years.
Even so, despite having only 25% of Japan's per capita income, the average Chinese consumer now eats as many eggs as his Japanese counterpart. –except that China's population is 11 times larger. Moreover, despite the many challenges that have besieged China's poultry sector, with layer productivity more than 50% higher than it was at the turn of the century, it is producing one-third more eggs with one quarter fewer chickens than it did fifteen years ago. Thus, while underdeveloped Indian and Southeast Asian egg demand may grow faster, China offers them a model on how to rapidly develop this industry to a high level of modernization. The implication is obvious: Thus, to succeed in supplying the world layer sector, there is no getting around understanding the dynamics of China's egg and layer sectors.
Within China itself, layers are mostly found in cool, temperate provinces that have nearby feed crop producing regions. Southern China's subtropical weather, while sustaining better wintertime production, is simply too hot for optimal layer performance for most of the year.
For that reason, most of China's eggs are produced either along northeastern coastal regions such as Jiangsu, Liaoning, Heliongjiang, Jilin and Shandong or in central interior provinces such as Anhui, Hebei, Henan and Sichuan. Collectively, these account 80% of China's egg production, with many provinces producing as many eggs as entire Asian countries.
Within China's self-contained egg market, coastal regions like Jiangsu, Liaoning and Heilongjiang export eggs to nearby large northeastern cities such as Shanghai, Tianjin and Beijing. With its bustling cities of Shenzhen, Dongguan and proximity to egg-hungry Hong Kong, southern China's Guangdong province is China's largest internal net egg importer, annually buying 1.6 million tonnes more than it produces. Guangdong's hunger for northeastern China's eggs is followed by the high demand regions of Beijing, Shanghai and Zhejiang province, which is becoming an extension of the latter city's metropolitan area.
Moreover, compared to the larger swine sector, China's layer production is highly integrated and has been for a long time. When China liberalized its economy in the early 1980s, Thailand's CP was the country's first foreign investor. Although it now competes with Chinese companies of similar technical sophistication and scale, CP spearheaded the modernization of China's layer sector to a level which hog producers would only reach decades later.
Interestingly, while the sector is far more consolidated than other protein lines, its scale economies continue to expand. A mid-2015 USDA report cites Wayne Liu, managing director of Ovodan Foods (China), as stating the size and production scale of layer facilities continues to increase.
According to Liu, in 2005, Jiangsu Province had a layer inventory of 150 million head, but only one farm had a flock exceeding 200,000 birds. In 2015 however, Jiangsu had 15 facilities holding 200,000 layers or more. Liu stated that at this time, China's largest layer farms house up to 3 million birds. Six hold more than one million layers and another 10 layer farms of this size and scale are expected to enter production over the next year.
In the same vein, this August saw Thailand-based CP's Chinese subsidiary complete a 270,000 head, Hy-Line brown commercial chick capacity expansion at its US$34 million integrated Cixi layer production facility complex in Zhejiang province. By the time the new birds reach their maximum productivity in August 2017, the facility should be able to produce 11,780 tonnes [equivalent to 190 million eggs] annually.
Going forward, despite all the above activity, it has not been an easy decade for the layer sector. While the scale of layer facilities continues to expand, the actual layer population has gradually declined over time. According to eFeedLink statistics, from over a billion head prior to 2005, layer inventories declined, fluctuating in the 700 million to 800 million head range from 2011 onwards.
On one hand, this is an impressive efficiency gain: In 2015, China produced 20.8% more eggs than it did in 2005 while using 19.1% fewer chickens, making for a 49% layer productivity gain over 10 years. Unfortunately, these layer efficiency gains coincided with a flattening out of consumption growth. This resulted in the mass closure of countless smaller producers. –Moreover, the scale of China's layer sector concentration rises as one goes up the value chain. For example, for liquid eggs, six processors account for over 80% of production. For powdered eggs, the industry is even more consolidated, with four plants accounting for nearly 85% of this line's output.
With average facility size rising rapidly, small and mid-scale farms with annual egg output below 6,000 tonnes were forced to close. The pace of closure was accelerated by the fact that even as plant scale increased, total layer inventories fell. According to Liu, Jiangsu province's vast increase in consolidation scale was accompanied by a 20% drop in that province's layer inventory, from 150 million head in 2005 to 120 million bird in 2015.
Moreover, Jiangsu province's experience has happened all over China. According to eFeedLink's estimates, from approximately a billion head in 2005, average annual layer inventories fell 24% over ten years. They bottomed out to an annual average of 760 million head in 2014 before rising marginally back to an average of 780 million head in the first six months of 2016.
Going forward, with China's egg consumption projected to rise by an average of 2% annually and layer efficiency expected to increase by almost the same amount, there is very little scope for layer numbers to rebuild themselves too far beyond current levels.
Moreover, when annual layer egg production is compared to average yearly inventories, we notice a curious change at work. Prior to 2010, the number of eggs produced per layer was typically rising at annual rates exceeding 6% and occasionally even 10% or more. Granted, these were 'easy' productivity gains that happen when an industry quickly moves from primitive conditions to professional management, from farm scraps to high quality feed materials, moves from barnyards to climate controlled facilities, and so on.
While the previous decade's rate of efficiency increase was clearly unsustainable, layer productivity apparently peaked around 2010. Since then hen productivity has fluctuated near peak levels without ever going beyond it.
There are known reasons for this. The past five years has seen the industry rocked by feed cost hyperinflation, a succession of food safety scandals and most damaging of all, several lethal bird flu epidemics. These extraordinary circumstances crippled the broiler side of China's poultry sector and also prevented layer farm operators from fully capitalizing on their investments.Assuming this exceptional string of crises is ending, efficiency should for several years rebound strongly, with several years of pent-up productivity growth finally being actualized under normal operating conditions. Thereafter, with personal egg consumption already at levels comparable to those in Japan and South Korea, the resumption of productivity growth will mean that layer inventories will probably stabilize within 10% of the 800 million head level reported by eFeedLink in July.
Of course, with inventories staying level but plant scale constantly increasing, an industry with thin profits will be see its smaller producers squeezed to the wall. As the most mature, slowest growing and yet most competitive of all Chinese protein lines, profits made by those who supply leading edge layer technology may exceed the earnings of surviving layer producers.
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