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Fu Zhekuan believes that bird flu could offer larger companies the chance to grow market share.
on June 29, 2009

Weak demand, safety fears, rising costs: China's producers face mixed outlook

Demand, supply and production difficulties hampered Chinese production last year but 2009 may see some improvement.

China's poultry industry has not been immune to the global financial crisis. However, the sector has also had other problems to confront food safety issues have harmed the country's producers, as have high feed prices. Yet, these problems also present opportunities.

Declining prices

The price of poultry meat and eggs fell in China last year, and may keep falling in 2009. In part, this has been due to the over-supply of breeders, but chicken prices have also been pulled downwards by the falling price of pork China's favourite meat.

Guo Huiyong, an agricultural analyst with Beijing Orient Agribusiness Consultant Ltd, explains: "In 2008, most Chinese producers would lose yuan 0.5-1 ($0.07-0.14) when they sold each kilo of eggs, and this trend lasted 10 months in large areas of the country. Egg producers greatly increased their chicken populations in 2008, based on the inadequate breeders' supply last year. And the excess supply caused the drop in egg prices also."

Chinese consumers are happy to switch between eating chicken meat and pork, making the price of one sensitive to price changes of the other. Average pork consumption in China is three times higher than that of poultry meat, according to a China Animal Agriculture Association (CAAA) report published in 2007.

Liu Shaobo, an agribusiness professor in the Animal Technology Department of Beijing's China Agriculture University, says: "Because of the replaceable relationship and Chinese diet habit, a drop in the price of pork greatly contributed to the falling price of chicken in 2008."

While some of the poultry industry's problems may now be behind it, a full recovery in prices is not expected soon. Xie Gang, an agricultural analyst at Shanghai-based Sinolink Securities Co Ltd, predicts: "Even if the domestic price of chicken meat goes up now, it will still be 20-30% lower in 2009 compared with that in 2008." The dismal macroeconomic situation in China will reduce demand for chicken.

Even in the face of the global economic slowdown, China's economy grew last year, gaining, according to official data, 9% during the first three quarters of 2008. In 2009, however, government officials worry that growth may slip below 8%, creating a shortage of jobs for migrant workers and recent graduates, and leading to social instability.

Consumers in China, as in many other countries, are increasingly saving rather than spending, and the ongoing uncertainty around employment can be expected to only add to this.

Food safety crisis spurs development

Melamine contamination of eggs and avian influenza outbreaks have damaged poultry meat and egg sales in China. However, these very problems have allowed large-scale producers to increase their market share at the expense of smaller, lower-quality producers, and have spurred companies to pay more attention to quality controls.

"As the egg crisis destroyed customers' trust in chicken products, the price of breeders went down from yuan 2.9 per chicken on October 30 to yuan 1.0 per chicken on November 5," Ding Pin, an analyst at Shanghai-based Haitong Securities Co Ltd, says. "The negative influence of melamine in eggs will continue affecting China's chicken industry until the end of the first quarter of 2009," he adds.

If avian influenza spreads further, it could hit the poultry industry hard, said China Agriculture University's Liu. "Because they focus on live poultry production and trade, chicken producers in the southern part of China, especially in Guangdong province, might severely suffer from bird flu outbreaks."

But Fu Zhekuan, a partner of Shenzhen Fortune Venture Capital Co Ltd, believes that bird flu could be a great opportunity for large-scale chicken companies to enlarge their market shares.

"Bird flu only hurts small companies without good reputations," Fu said. "Processing companies are afraid of purchasing raw materials from small producers at this time."

He believes that China's poultry industry can use this opportunity to start large-scale operations, which would also make it easier for the government to supervise food safety.

"Food safety issues force the government to work hard on quality supervision," he adds. "As a result, feed suppliers, chicken producers and processing companies have to improve their quality controls."

Dalian-based Hanwei Group Co Ltd, for example, recently announced that it had bought specialised equipment to inspect chicken feed for melamine.

Feed outlook improves

As the domestic price of soya bean meals increased from Yuan 3.87 per kilo in January to Yuan 4.0 per kilo in April last year, China's poultry and egg industries suffered, but experts believe that this will not affect profits in 2009.

"Because of worldwide food shortages, the price of soya beans and corn went up, which caused the gross profit rates of breeders during the first half year of 2008 to go down by 14% compared to that in the same period of 2007," said Minhe in its latest interim statement.

"But the feed price will drop by 5% in 2009 compared to last year, based on a reasonable soya bean price trend," said Guo of Orient Agribusiness. "Chinese feed prices depend on the export soya bean price, which accounts for 30% of the total feed price.

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Liu Shaobo notes that the price of chicken is highly sensitive to pork prices.
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